13916 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

1 88 FR 11865. 

2 ‘‘New Supplemental Payment Reporting and 

Medicaid Disproportionate Share Hospital 

Requirements under the Consolidated 

Appropriations Act, 2021,’’ State Medicaid Director 

Letter #21–006, December 10, 2021. Available at 

https://www.medicaid.gov/federal-policy-guidance/ 

downloads/smd21006.pdf. 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 433, 447, 455, and 457 

[CMS–2445–F] 

RIN 0938–AV00 

Medicaid Program; Disproportionate 

Share Hospital Third-Party Payer Rule 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), Department 

of Health and Human Services (HHS). 

ACTION: Final rule. 

SUMMARY: This final rule primarily 

addresses recent legislative changes to 

the Social Security Act as a result of the 

Consolidated Appropriations Act, 2021 

changes to the hospital-specific limit on 

Medicaid disproportionate share 

hospital (DSH) payments. This final rule 

affords States and hospitals more clarity 

on how the limit, the changes that took 

effect on October 1, 2021, will be 

calculated. Additionally, this final rule 

enhances administrative efficiency by 

making technical changes and 

clarifications to the DSH program. 

DATES: 

Effective date: These regulations are 

effective on April 23, 2024. 

Applicability date: Sections 

447.295(b) and (d), 447.299(c)(6), (7), 

(10), and (16), and 455.304(d)(1), (3), (4), 

and (6) are applicable as of October 1, 

2021 (see section III. of this final rule for 

additional information). 

FOR FURTHER INFORMATION CONTACT: Lia 

Adams, (410) 786–8258, Charlie Arnold, 

(404) 562–7425, Richard Cuno, (410) 

786–1111, Stuart Goldstein, (410) 786– 

0694, Charles Hines, (410) 786–0252, 

and Mark Wong, (415) 744–3561, for 

Medicaid Disproportionate Share 

Hospital Payments and Overpayments. 

Jennifer Clark, (410) 786–2013, for 

Children’s Health Insurance Program 

(CHIP). 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Overview 

Title XIX of the Social Security Act 

(the Act) established the Medicaid 

program as a Federal-State partnership 

for the purpose of providing and 

financing medical assistance to 

specified groups of eligible individuals. 

States have considerable flexibility in 

designing their programs but must abide 

by requirements specified in the Federal 

Medicaid statute and regulations. Each 

State is responsible for administering its 

Medicaid program in accordance with 

an approved State plan, which specifies 

the scope of covered services, groups of 

eligible individuals, payment 

methodologies, and all other 

information necessary to assure the 

State plan describes a comprehensive 

and sound structure for operating the 

Medicaid program, and ultimately, 

provides a clear basis for claiming 

Federal matching funds. 

Section 1902(a)(13)(A)(iv) of the Act 

requires that States consider the 

situation of hospitals that serve a 

disproportionate share of low-income 

patients with special needs, in a manner 

consistent with section 1923 of Act, in 

determining payments. The purpose of 

the proposed rule 1 and this final rule is 

to update the regulatory requirements of 

the disproportionate share hospital 

(DSH) program in response to the 

Consolidated Appropriations Act, 2021 

(herein, referred to as the CAA 2021) 

(Pub. L. 116–260, December 27, 2020) 

and to further improve upon the 

program. More specifically, the 

provisions of this final rule seek to 

implement the DSH-related provisions 

of the CAA 2021 concerning the 

treatment of third-party payments for 

purposes of calculating Medicaid 

hospital-specific DSH limits. We note 

that the CAA 2021 also created new 

supplemental payment reporting 

requirements through the addition of 

section 1903(bb) of the Act; however, 

DSH payments were specifically 

excluded from these requirements, and 

we have issued guidance on those 

requirements.2

This final rule also revises regulatory 

payment and financing definitions and 

other regulatory language that could be 

subject to misinterpretation, refines 

administrative procedures used by 

States to comply with Federal 

regulations, and removes regulatory 

requirements that have been difficult to 

administer and do not further the 

program’s objectives. 

We are finalizing all provisions as 

proposed, although we note that the 

regulations have some minor phrasing 

changes for consistency with current 

style guidelines. For the CAA 2021- 

related provisions of this final rule, we 

are finalizing an applicability date of 

October 1, 2021, to align with the 

effective date in the statute. This 

information is noted in each of the CAA 

2021-related provision sections and 

discussed in section III. of this final 

rule. The remaining provisions of this 

final rule are effective 60 days after 

publication of the final rule. 

B. Disproportionate Share Hospital 

(DSH) Payments 

1. Background 

States are statutorily required to make 

DSH payments to qualifying hospitals 

that serve patients who are uninsured 

and enrolled in the Medicaid program, 

as described in section 1923(d) of the 

Act. States generally have flexibility 

regarding the specific hospitals to which 

they make payments and how they 

determine the amount of those 

payments, within certain parameters. 

Section 1902(a)(13)(A)(iv) of the Act 

requires that States consider the 

situation of hospitals that serve a 

disproportionate number of low-income 

patients with special needs, in a manner 

consistent with section 1923 of the Act. 

DSH payments are not considered part 

of base payments or supplemental 

payments to providers, as they are made 

under distinct statutory authority. 

Section 1923 of the Act contains 

specific requirements related to DSH 

payments, including aggregate annual 

State-specific DSH allotments that limit 

Federal financial participation (FFP) for 

Statewide total DSH payments under 

section 1923(f) of the Act, and hospitalspecific limits on DSH payments under 

section 1923(g) of the Act. Under the 

statutory hospital-specific limits, a 

hospital’s DSH payments may not 

exceed the costs incurred by that 

hospital in furnishing inpatient and 

outpatient hospital services during the 

year to certain Medicaid beneficiaries 

and the uninsured, less payments 

received under title XIX (other than 

section 1923 of the Act) and payments 

by uninsured patients. In addition, 

section 1923(a)(2)(D) of the Act requires 

States to provide an annual report to the 

Secretary describing the DSH payment 

adjustments made to each DSH. 

Section 1001(d) of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173, December 8, 2003) added 

section 1923(j) of the Act to require 

States to report additional information 

about their DSH programs. Section 

1923(j)(1) of the Act requires States to 

submit an annual report including an 

identification of each hospital that 

received a DSH payment adjustment 

during the preceding fiscal year (FY) 

and the amount of such adjustment, and 

such other information as the Secretary 

determines necessary to ensure the 

appropriateness of the DSH payment 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13917 

3Audit of Selected States’ Medicaid 

Disproportionate Share Hospital Programs,’’ March 

2006 (A–06–03–00031), https://www.oig.hhs.gov/ 

oas/reports/region6/60300031.pdf. 

4https://www.gao.gov/assets/660/650322.pdf. 

adjustments for such FY. Additionally, 

section 1923(j)(2) of the Act requires 

States to submit an independent 

certified audit of the State’s DSH 

program, including specified content, 

annually to the Secretary. 

2. Consolidated Appropriations Act, 

2021 (CAA 2021) DSH Requirements 

The CAA 2021 was enacted on 

December 27, 2020. It modified the 

Medicaid statute in several ways, 

including by updating section 1923 of 

the Act. Specifically, Division CC, Title 

II, section 203 of the CAA 2021 (herein 

referred to as section 203) amended 

section 1923(g) of the Act, which 

describes the methodology for 

calculating hospital-specific Medicaid 

DSH limits. This provision took effect 

October 1, 2021. For purposes of 

calculating the hospital-specific DSH 

limit, section 203 of the CAA 2021 

modified the calculation of the 

Medicaid portion of the hospitalspecific DSH limit to include only costs 

and payments for services furnished to 

beneficiaries for whom Medicaid is the 

primary payer for such services, as 

specified in section 1923(g)(1)(B)(i) of 

the Act. Accordingly, the limit excludes 

costs and payments for services 

provided to Medicaid beneficiaries with 

other sources of coverage, including 

Medicare and commercial insurance. 

Section 1923(g) of the Act, as modified 

by the CAA 2021, includes an exception 

to this methodology for hospitals in and 

above the 97th percentile of all hospitals 

with respect to inpatient days made up 

of patients who, for such days, were 

entitled to Medicare Part A benefits and 

to supplemental security income (SSI) 

benefits (97th percentile hospitals). This 

exception, as described in section 

1923(g)(2)(B) of the Act, applies to 

hospitals that are in or above the 97th 

percentile, either with respect to the 

number of inpatient days or percentage 

of total inpatient days that were made 

up of such days. The exception provides 

qualifying hospitals with a hospitalspecific limit that is the higher of that 

calculated under the methodology in 

which costs and payments for Medicaid 

patients are counted only for 

beneficiaries for whom Medicaid is the 

primary payer, or the methodology in 

effect on January 1, 2020. From June 2, 

2017, to the passage of the CAA 2021, 

payments made by all third-party payers 

(TPP), such as Medicare, other insurers, 

and beneficiary cost sharing, would all 

be included in the calculation of 

hospital-specific DSH limits, in 

accordance with the ‘‘DSH Payments— 

Treatment of Third-Party Payers in 

Calculating Uncompensated Care Costs’’ 

final rule in the April 3, 2017, Federal 

Register (82 FR 16114), which 

delineated the treatment of TPP and the 

calculation of hospital-specific DSH 

limits. 

We acknowledge there are data 

limitations, which we describe later in 

this rule, that have delayed CMS’ ability 

to clarify which hospitals qualify for the 

exception for 97th percentile hospitals. 

We proposed how we would determine 

which hospitals qualify for this 

exception and are finalizing as 

proposed. 

3. Annual DSH Audits and 

Overpayments 

The ‘‘Medicaid Program; 

Disproportionate Share Hospital 

Payments’’ final rule published in the 

December 19, 2008, Federal Register (73 

FR 77904) (and herein referred to as the 

2008 DSH audit final rule) sets forth the 

data elements necessary to comply with 

the requirements of section 1923(j) of 

the Act related to auditing and reporting 

of DSH payments under State Medicaid 

programs. The regulations at 42 CFR 

447.299(c) finalized in the 2008 DSH 

audit final rule outline 18 data elements 

States must submit to CMS, at the same 

time as the State submits the completed 

audit required under 42 CFR 455.304, to 

permit CMS verification of the 

appropriateness of such payments. One 

such data element is the total 

uncompensated care cost, which equals 

the total cost of care for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid eligible 

individuals and to individuals with no 

source of third-party coverage for the 

hospital services they receive, less the 

sum of other payment sources listed in 

§ 447.299(c)(16). Despite the robust data, 

potential data gaps may exist as a result 

of an auditor identifying an area, or 

areas, in which documentation is 

missing or unavailable for certain costs 

or payments that are required to be 

included in the calculation of the total 

eligible uncompensated care costs. 

Consequently, at times we are unable 

to determine whether a DSH 

overpayment to a provider has occurred, 

the root causes of any overpayments, 

and the amount of the overpayments 

associated with each cause. In current 

practice, an auditor may include a 

finding (or ‘‘caveat’’) in the audit, 

stating that the missing information may 

impact the calculation of total eligible 

uncompensated care costs, rather than 

making a determination of the actual 

financial impact of the identified issue. 

This lack of transparency results in 

uncertainty even if costs are ultimately 

correct and restricts CMS’ and States’ 

ability to ensure proper recovery of all 

FFP associated with DSH overpayments 

identified through annual DSH audits in 

instances where errors did occur. 

In the past, the Office of Inspector 

General (OIG) and the Government 

Accountability Office (GAO) have raised 

concerns similar to ours regarding 

oversight of the Medicaid DSH program. 

The 2008 DSH audit final rule 

addressed concerns raised by OIG 3 by 

implementing in regulations the 

independent certified audit 

requirements under section 1923(j) of 

the Act, by requiring States to include 

data elements as specified in 

§ 447.299(c) with their annual audits. In 

2012, GAO published the report 

‘‘Medicaid: More Transparency of and 

Accountability for Supplemental 

Payments are Needed.’’ 4 Although 

Medicaid DSH payments are not 

‘‘supplemental payments,’’ as described 

previously, they are akin to 

supplemental payments, and thus, 

GAO’s report did not focus on 

supplemental payments exclusively. As 

part of the report, GAO analyzed the 

2010 DSH audits for 2007 DSH 

payments and found DSH payments that 

did not comply with the audit 

requirements specified in part 455, 

subpart D. For each of the required DSH 

audit elements, there were a number of 

hospitals for which GAO could not 

determine compliance due to data 

reliability or documentation issues. For 

example, GAO could not determine 

compliance with the requirement that 

uncompensated care costs are accurately 

calculated for 33.7 percent of hospitals 

analyzed by GAO. The report highlights 

that, although the independent certified 

audit requirements have allowed us to 

identify various compliance issues and 

quantify some provider overpayments, 

in some instances, findings remain 

unquantified. 

We agree with the report that more 

transparency is needed, but to obtain 

the necessary overpayment amounts 

under current reporting processes, CMS 

or the State would have to conduct a 

secondary review or audit, which would 

be burdensome and largely redundant. 

By requiring States to submit to CMS in 

the annual reports described in 

§ 447.299(c) a dollar estimate of any 

Medicaid DSH provider overpayments, 

we ensure this calculation occurs with 

the primary audit and eliminates 

redundancy in reviewing 

documentation. As discussed further in 

section II. of this final rule, this is 

intended to further enhance our 


ddrumheller on DSK120RN23PROD with RULES4
13918 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

5Patient Protection and Affordable Care Act of 

2010, Public Law 111–148, as amended by the 

Health Care and Education Reconciliation Act of 

2010, Public Law 111–152. 6 84 FR 50308. 

7Section 1923(f)(5)(B) describes low DSH States 

as ‘‘State[s] in which the total expenditures under 

the State plan (including Federal and State shares) 

for [DSH] adjustments under this section for fiscal 

year 2000, as reported to the Administrator of the 

Centers for Medicare and Medicaid Services as of 

August 31, 2003, is greater than 0 but less than 3 

percent of the State’s total amount of expenditures 

under the State plan for medical assistance during 

the fiscal year.’’ 

oversight to better ensure the integrity of 

hospital-specific limit calculations. 

Amounts in excess of the hospitalspecific limit are regarded as 

overpayments to providers, under 42 

CFR part 433, subpart F. Section 

1903(d)(2)(C) of the Act provides that, 

when an overpayment by a State is 

discovered, the State has a 1-year period 

to recover or attempt to recover the 

overpayment before an adjustment is 

made to FFP to account for the 

overpayment. FFP is not available for 

DSH payments that are found in the 

independent certified audit to exceed 

the hospital-specific limit. Currently, 

regulations in § 433.316 provide for 

determining the date of discovery of an 

overpayment, which is necessary to 

determine the statutory 1-year period, 

but it does not specify how this relates 

to the independent certified DSH audits 

required under section 1923(j)(2) of the 

Act and 42 CFR part 455, subpart D. 

Accordingly, the discovery of 

overpayments necessitates the return of 

the Federal share, or redistribution by 

the State of the overpaid amounts to 

other qualifying hospitals, in 

accordance with the State’s approved 

Medicaid State plan. While the 

preamble to the 2008 DSH audit final 

rule generally addressed the return or 

redistribution of provider overpayments 

identified through DSH audits, it did 

not include specific procedural 

requirements for returning or 

redistributing overpayments. Therefore, 

we have identified this area as an 

opportunity to strengthen program 

oversight and integrity protections, 

specifically with respect to the 

overpayment and redistribution 

reporting process and requirements for 

identifying the financial impact of audit 

findings. In the proposed rule, we 

proposed requirements to enhance these 

areas, which we are now finalizing as 

proposed. 

4. DSH Health Reform Reduction 

Methodology 

Section 2551 of the Affordable Care 

Act 5 (ACA) amended section 1923(f) of 

the Act to require aggregate reductions 

to State Medicaid DSH allotments 

annually from FY 2014 through FY 

2020, to account for the then-anticipated 

decrease in uncompensated care 

resulting from expansions of coverage 

authorized by the ACA. The ACA 

specified in section 1923(f)(7)(B) of the 

Act certain factors CMS must consider 

in implementing these reductions and 

left certain components of the 

methodology to the Secretary of Health 

and Human Services to define (as 

described later in this section). The 

methodology is referred to as the DSH 

Health Reform Methodology (DHRM). 

We published a final rule in October 

2013 that delineated a methodology to 

implement the annual reductions only 

for FY 2014 and FY 2015 to 

accommodate data refinement and 

methodology improvement for later 

reduction years. However, Congress has 

since modified section 1923(f)(7) of the 

Act several times such that the 

reductions have never taken effect. In 

the September 25, 2019, Federal 

Register, we published a final rule 6

(2019 final rule) delineating a revised 

methodology for the calculation of DSH 

allotment reductions, which at that time 

were scheduled to begin in 2020. 

Congress has since further delayed the 

start of these reductions until FY 2024. 

The CAA 2021 modified section 1923(f) 

of the Act such that the reductions 

occur from FY 2024 through FY 2027, 

in the amount of $8 billion each year. 

Section 1923(f)(7) of the Act requires 

the Secretary to develop a methodology 

to determine the annual, State-by-State 

DSH allotment reduction amounts based 

on five factors: uninsured factor (UPF); 

Medicaid volume factor (HMF); 

uncompensated care factor (HUF); low 

DSH State factor (LDF); and the budget 

neutrality factor (BNF). The 2019 final 

rule assigned weights to the annual 

reduction amount for the three core 

factors: UPF, HMF, and HUF. The 

remaining two factors, the LDF and the 

BNF, affect the allocation of the 

reduction amounts within the three core 

factors. The LDF accomplishes this 

allocation at the front end of the 

calculations by shifting a portion of the 

reduction amount specified under 

section 1923(f)(7)(A)(ii) of the Act to 

non-low DSH States. Following this 

step, we determine the reduction 

calculations prescribed by the three core 

factors. We then perform additional 

reductions associated with the BNF 

within the HMF and HUF for States that 

divert DSH allotment amounts under 

section 1115 demonstrations. We then 

reallocate these reduction amounts 

away from States that do not divert DSH 

allotment amounts under section 1115 

demonstrations, to comply with the 

aggregate reduction amounts specified 

under statute at section 1923(f)(7)(A)(ii) 

of the Act. The five factors are specified 

in section 1923(f)(7)(B) of the Act as 

follows: 

• UPF—The statute requires that 

States with lower uninsurance rates 

receive higher percentage DSH 

reductions. Calculations performed 

under this factor utilize Census Bureau 

data that is subject to a 1-year lag. 

• HMF—The statute requires that 

States that target DSH payments to 

hospitals with high Medicaid volume 

receive a lower percentage reduction in 

their DSH allotment. Calculations 

performed under this factor utilize DSH 

audit data that is on a 3-year lag. 

• HUF—As required by statute, States 

that target DSH payments to hospitals 

with high levels of uncompensated care 

receive a lower percentage reduction in 

their DSH allotment. Calculations 

performed under this factor utilize DSH 

audit data that is on a 3-year lag. 

• Low DSH State factor—Section 

1923(f)(7)(B)(ii) of the Act requires that 

statutorily defined ‘‘low DSH States’’ 7

receive a lower overall DSH reduction 

percentage than non-low DSH States. To 

accomplish this, low DSH States and 

non-low DSH States are separated into 

two cohorts before applying the 

reduction methodology. 

• BNF—DSH allotment amounts 

diverted for coverage expansion under 

section 1115 demonstrations approved 

as of July 31, 2009, receive a limited 

protection from reduction. 

5. Modernizing the Publication of 

Annual DSH and Children’s Health 

Insurance Program (CHIP) Allotments 

Section 447.297 provides a process 

and timeline for us to publish 

preliminary and final annual DSH 

allotments and national expenditure 

targets in the Federal Register. The 

current requirements specify that we 

publish DSH preliminary allotments 

and national expenditure targets by 

October 1 of each Federal fiscal year 

(FFY) and publish the final allotments 

and national expenditure targets by 

April 1 of that FFY. We have found the 

current regulatory Federal Register 

publication process to be time 

consuming and administratively 

burdensome for us, and ultimately 

unnecessary in light of more timely 

notification practices already taking 

place. 

Similarly, section 2104 of the Act 

provides appropriations for FY CHIP 

allotments for FYs 1998 through 2029. 

Regulations at 42 CFR 457.609 describe 

the process for calculating State CHIP 


ddrumheller on DSK120RN23PROD with RULES4
Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13919 

allotments for a FY after FY 2008. 

Section 457.609(h) provides that CHIP 

allotments for a FY may be published as 

preliminary or final allotments in the 

Federal Register as determined by the 

Secretary. Similar to the current DSH 

allotment publication process, we have 

found the current FY CHIP allotment 

publication regulations administratively 

burdensome and less efficient than 

other means of notification. We 

proposed to codify the process already 

taking place while eliminating 

inefficient and duplicative publication 

requirements, and we are finalizing 

those proposals in this final rule. 

II. Provisions of the Final Rule and 

Responses to Comments 

A. When Discovery of Overpayment 

Occurs and Its Significance (§ 433.316) 

Section 1903(d)(2)(C) of the Act 

provides that, when an overpayment by 

a State is discovered, the State has a 

1-year period to recover or attempt to 

recover the overpayment before an 

adjustment is made to FFP to account 

for the overpayment. Currently, 

regulations in § 433.316 provide for 

determining the date of discovery of an 

overpayment to a provider, which is 

necessary to determine the statutory 

1-year period, in three distinct cases: (1) 

when the overpayment results from a 

situation other than fraud, under 

§ 433.316(c); (2) when the overpayment 

results from fraud, under § 433.316(d); 

and (3) when the overpayment is 

identified through a Federal review, 

under § 433.316(e). It is not explicitly 

clear in the current regulations how the 

date of discovery is determined when an 

overpayment is discovered through the 

annual DSH independent certified audit 

required under § 455.304. Therefore, we 

believe a regulatory change is 

appropriate to specify the date of 

discovery of overpayments, as it relates 

to the annual DSH independent certified 

audit. 

Accordingly, we proposed to 

redesignate paragraphs (f) through (h) of 

§ 433.316 as paragraphs (g) through (i), 

respectively, and to add a new 

paragraph (f). In the new paragraph (f), 

we proposed that, in the case of an 

overpayment identified through the 

DSH independent certified audit 

required under part 455, subpart D, we 

would consider the overpayment as 

discovered on the earliest of either the 

date that the State submits the DSH 

independent certified audit report 

required under § 455.304(b) to CMS, or 

of any of the dates specified in 

§ 433.316(c): paragraph (c)(1) (the date 

on which any Medicaid agency official 

or other State official first notifies a 

provider in writing of an overpayment 

and specifies a dollar amount that is 

subject to recovery); paragraph (c)(2) 

(the date on which a provider initially 

acknowledges a specific overpaid 

amount in writing to the Medicaid 

agency); and paragraph (c)(3) (the date 

on which any State official or fiscal 

agent of the State initiates a formal 

action to recoup a specific overpaid 

amount from a provider without having 

first notified the provider in writing). 

We noted that this change would afford 

more clarity concerning the 

independent certified DSH audit and 

the requirements on States based on 

those audits. 

We received public comments on this 

proposal. The following is a summary of 

the public comments we received and 

our responses. Because of its 

relationship with the proposed 

provisions at § 447.299(f) and (g), which 

pertain to the treatment of 

overpayments, these topics overlapped 

in the comments received. Here, we 

specifically address comments that 

referenced the date of discovery, the 

aspect specific to this proposal, but 

recommend that the reader review and 

consider the comments received and our 

responses on all three provisions (that 

is, §§ 433.316(f) and 447.299(f) and (g)) 

in tandem. 

Comment: A couple commenters were 

opposed to the date an overpayment is 

considered ‘‘identified’’ as being the 

date of audit submission. They cited 

issues such as a need to perform 

additional review and secondary 

auditing, or to adequately account for 

redistributions of Medicaid DSH 

payments in excess of the hospitalspecific limit (if provided for under the 

State plan), or to compute alternate 

payment methodologies for specialty 

hospitals that exceed the hospitalspecific DSH limit. 

Response: We are finalizing this 

provision as proposed. We understand 

the concern expressed by the 

commenters but disagree that the 

method for determining the date of 

discovery of an overpayment should be 

changed from the proposal. Finalizing 

the date of discovery to include the date 

the audit is submitted is consistent with 

our approach to determining the date 

that other overpayments are discovered 

as described in § 433.316(c). 

Specifically, § 433.316(c)(1) and (3) refer 

to the date on which a State official (or 

fiscal agent) first notifies a provider in 

writing of a specific overpayment 

amount subject to recovery or begins a 

formal action to recoup that amount 

without prior written notification. 

Section 433.316(c)(2) refers to the date 

on which a provider acknowledges a 

specific overpaid amount in writing to 

the State Medicaid agency. Each of these 

focuses on the date the State provides, 

or receives from a relevant third party, 

written notification (or initiates a 

recoupment action without prior written 

notification to the provider) of a specific 

overpaid amount. Similarly, the 

independent certified audit formalizes 

the identification of a specific 

overpayment amount when it is 

submitted. 

We also note that finalizing the date 

of State submission of the independent 

certified audit to CMS as an available 

date for discovery of an overpayment, as 

opposed to the date the State’s auditor 

first identifies an amount to the State 

before the State submits the audit to 

CMS, affords the State an opportunity to 

review and make appropriate 

adjustments, as is typical with similar 

audit data. The State has up to 90 days 

after receipt of the independent certified 

audit to review it before it must be 

submitted to CMS in accordance with 

§ 455.304(b) which we believe is ample 

time to review DSH audit findings and 

resolve any disagreement with the 

audit’s contents and/or with 

overpayment determinations by working 

with the State’s auditor. 

In addition, we believe the concerns 

expressed by commenters are mitigated 

by other provisions we are finalizing in 

this rule at § 447.299(f) and (g). 

Specifically, by clarifying under 

§ 447.299(f) that amounts identified in 

DSH audits that exceed the hospitalspecific DSH limit are to be treated as 

overpayments, States are afforded the 

opportunities provided under other 

overpayment circumstances, which 

includes the opportunity for a 

downward adjustment of an 

overpayment amount under § 433.320(c) 

as appropriate. This addresses concerns 

about the fact that the overpayment 

amount identified in an audit may be 

subject to change. In addition, we note 

that States have 2 years to complete 

redistributions under the provision we 

are finalizing at § 447.299(g), when in 

other circumstances, such as returning 

Federal share, a State only has 1 year to 

take action on an overpayment. This 

affords States ample time to compute 

and perform redistributions of payments 

to particular hospitals in excess of the 

hospital-specific DSH limit. Finally, if a 

State plans to utilize an alternate 

payment methodology to address 

circumstances when a hospital may 

exceed its DSH limit, such as by 

decreasing supplemental payments, this 

methodology would need to be reflected 

in the State plan. Like DSH payment 

redistribution methodologies, a State 

should have this methodology in place 


ddrumheller on DSK120RN23PROD with RULES4
13920 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

8 84 FR 50308 at 50328, wherein we discuss the 

policy to assign average amounts in the 2019 final 

rule. 

well in advance of identifying DSH 

overpayments for a given year. We note 

that, in our experience, payment 

adjustments necessary to implement an 

alternate payment methodology 

typically are performed far in advance 

of the timing of the DSH audit for the 

relevant year. Nevertheless, if a State 

intends to utilize an alternate payment 

methodology in the event that 

overpayments are identified in a DSH 

audit, and that State has this 

methodology reflected in its State plan, 

we do not anticipate that the work 

necessary to implement the alternative 

payment methodology would be any 

more complex or burdensome than the 

work necessary to implement DSH 

overpayment redistribution 

methodologies; as such, we do not agree 

the possible existence of an alternate 

payment methodology would require 

more time for States once an 

overpayment is identified. 

B. DSH Health Reform Reduction 

Methodology (§ 447.294) 

As discussed in section I.B.4. of this 

final rule, section 1923(f)(7)(B)(iii) of the 

Act requires that the methodology for 

calculating each State’s Medicaid DSH 

allotment reduction, as first established 

by the ACA, consider the extent to 

which the DSH allotment for a State was 

included in the budget neutrality 

calculation for a coverage expansion 

approved under section 1115 (that is, a 

section 1115 demonstration to provide 

coverage to individuals not otherwise 

eligible for Medicaid) as of July 31, 

2009. In the 2019 final rule, we finalized 

a policy to exclude from DSH allotment 

reductions the amount of DSH allotment 

States had approved as of July 31, 2009, 

under a coverage expansion section 

1115 demonstration. Any DSH 

allotment amounts included in budget 

neutrality calculations for non-coverage 

expansion purposes (for example, where 

DSH allotment amounts included in 

budget neutrality calculations have been 

used to match State expenditures for 

approved delivery system reform 

initiatives) under approved section 1115 

demonstrations are still subject to 

reduction regardless of when they were 

approved. Further, the preamble to the 

2019 final rule indicates that for any 

section 1115 demonstrations not 

approved as of July 31, 2009, these DSH 

allotment amounts included in budget 

neutrality calculations, whether for 

coverage expansion or otherwise, would 

also be subject to reduction. We note 

that all section 1115 demonstrations 

approved as of or before July 31, 2009, 

have expired and the protection does 

not apply to renewals or extensions of 

those section 1115 demonstrations. 

Therefore, there no longer exist any 

amounts related to coverage expansion 

to be excluded from future DSH 

allotment reductions scheduled to begin 

in FY 2024. 

In the absence of DSH audit data 

relating to how States expend DSH 

allotment amounts diverted under 

section 1115 demonstrations, we 

propose to assign average HUF and 

HMF reduction percentages to these 

amounts.8 We believe this approach is 

a reasonable method to determine 

reductions for the HUF and HMF 

factors, given the absence of relevant, 

hospital-specific DSH payment data for 

these payments. We considered using 

alternative percentages higher or lower 

than the average but settled on average 

percentages due to concerns that 

alternative percentages might provide 

an unintended benefit or penalty to 

these States for DSH diversions 

approved under a demonstration under 

section 1115 of the Act. 

While the provisions of 

§ 447.294(e)(12) are clear that we will 

assign average reductions to amounts 

associated with non-coverage expansion 

purposes in effect as of July 31, 2009, 

only the preamble to the 2019 final rule 

addresses the amounts diverted under a 

section 1115 demonstration approved 

after July 31, 2009. Additionally, the 

regulations are not specific regarding 

how these amounts are determined and 

accounted for in the DSH allotment 

reduction methodology. As such, we 

proposed to update the regulations at 

§ 447.294(e)(12) to clearly specify that 

amounts diverted under a section 1115 

demonstration approved after July 31, 

2009, are subject to average reductions 

under the HUF and HMF so that the 

regulation may better reflect the policy 

finalized in the 2019 final rule 

preamble. 

In addition, we proposed to remove 

the language, ‘‘for the specific fiscal year 

subject to reduction’’ in § 447.294(e)(12) 

introductory text and (e)(12)(i), because 

we are concerned that the current 

regulatory language could lead to 

anomalous results, as discussed later in 

this section. We proposed that the 

determination of diverted amounts that 

are subject to average reductions under 

the HUF and HMF would align with the 

State plan rate year (SPRY) for the DSH 

audits utilized in the DSH allotment 

reduction calculations, as specified in 

§ 447.294(d), rather than the fiscal year 

subject to reduction. For example, when 

calculating the statutorily required DSH 

allotment reductions for FY 2024 (the 

fiscal year subject to reduction), we 

would utilize data from each State’s 

SPRY 2019 DSH audit data because this 

would be the most recent data available 

to us. For States that do not divert their 

entire DSH allotment, we would include 

the amount of each State’s DSH 

allotment diverted under a section 1115 

demonstration for the time period that 

aligns with the associated SPRY (in this 

example, SPRY 2019). A discussion of 

States that divert their entire DSH 

allotment follows this discussion. Each 

State would then be assigned the 

average HUF and HMF reduction 

amounts for the State’s respective State 

group based on this diverted amount. 

Section 477.294(e)(12) introductory 

text and (e)(12)(i) currently align the 

amount of DSH allotment diverted 

under a section 1115 demonstration for 

a fiscal year with the fiscal year of the 

DSH allotment subject to reduction 

under section 1923(f)(7)(A)(ii) of the 

Act. We recognize that this nonalignment between the SPRY 2019 DSH 

audit data that we would use to 

determine the HUF and HMF, and the 

FY 2024 section 1115 demonstration 

budget neutrality calculation diversion 

amount that would be used under the 

current regulation, could result in 

inappropriate and illogical outcomes. 

For example, in a case where a State 

claimed all or almost all of its DSH 

allotment amount for DSH expenditures 

for the SPRY DSH audit utilized in the 

DHRM (here, SPRY 2019), but later 

diverted a large portion of its DSH 

allotment amount under a section 1115 

demonstration during a year subject to 

DSH allotment reductions (here, FY 

2024), the State could receive a 

reduction on an amount (including both 

DSH payments and DSH allotment 

diverted under a section 1115 

demonstration) that is excess of the 

amount available under its current DSH 

allotment subject to reductions. 

Therefore, we stated our belief that our 

proposed approach is reasonable 

because in the absence of DSH audit 

data relating to how States expend DSH 

allotment amounts diverted under 

section 1115 demonstrations, CMS will 

assign average HUF and HMF reduction 

percentages to these diverted amounts. 

As such, it is appropriate that the 

amounts diverted under section 1115 

demonstrations should align with the 

SPRY of the DSH audit used in the 

DHRM and that the amounts subject to 

reduction do not exceed what States 

could have expended, either through 

DSH payments or diverted DSH 

allotment amounts, during the 

associated SPRY. We considered leaving 

the current regulatory text unchanged. 


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9 82 FR 35155 at 35157; 84 FR 50308 at 50322. 

However, we stated our belief it is 

important to update the current 

regulation in the interest of clarity and 

transparency and to avoid a potential 

outcome wherein a State might receive 

an inappropriately large reduction due 

to a misalignment of time periods for 

elements of the reduction methodology. 

Accordingly, we proposed to revise 

§ 477.294(e)(12) introductory text to 

remove language indicating that the 

BNF and budget neutrality calculations 

are applied to each State’s amount of 

DSH allotment diverted under a section 

1115 demonstration ‘‘for the specific 

fiscal year subject to reduction.’’ 

Further, we proposed to amend 

§ 477.294(e)(12)(ii) to specify that the 

budget neutrality calculations are 

performed on the amount of each State’s 

DSH allotment diverted under an 

approved section 1115 demonstration 

during the period that aligns with the 

associated SPRY DSH audit utilized in 

the DSH allotment reductions. 

For States that divert their entire DSH 

allotment, and as such do not complete 

DSH audits, we are unable to use a DSH 

audit SPRY. Therefore, we proposed to 

apply reductions under the HMF and 

HUF to the DSH allotment that the State 

would have had available during the 

demonstration year (DY) coinciding 

with the SPRY DSH audits utilized in 

the DHRM. We also proposed to prorate 

the FFY allotment amount to determine 

this reduction in cases where the DY of 

the section 1115 demonstration crosses 

two FFYs. For example, as stated 

previously we would use SPRY 2019 

DSH audit data for FFY 2024 DSH 

allotment reductions. However, if a 

State that diverts its entire DSH 

allotment has a DY that begins July 1, 

2018, and ends June 30, 2019, we would 

have to determine the reduction amount 

associated with the diverted DSH 

allotment to reflect the amount of the 

FFY 2018 DSH allotment available from 

July 1, 2018, through September 30, 

2018, and the amount of FFY 2019 DSH 

allotment available from October 1, 

2018, through June 30, 2019. We stated 

that we did not believe it would be 

appropriate to calculate the reduction 

associated with the diverted DSH 

allotment using the full FFY 2019 DSH 

allotment because the diverted DSH 

funds would not have been available for 

the full DY ending June 30, 2019. For a 

State that diverts part of its DSH 

allotment, it would have a SPRY DSH 

audit already utilized in the DHRM. We 

would use the diverted DSH amount 

from the same SPRY, which may also 

involve prorating diverted DSH amounts 

from a DY, depending on whether the 

DY as specified in the section 1115 

demonstration aligns with the SPRY. In 

previous rulemaking, we proposed and 

finalized a policy to utilize the most 

recent year available for all data sources 

and to align the SPRY of data sources 

whenever possible.9 Providing this 

clarification in regulation through this 

rulemaking would accomplish this goal. 

We received public comments on 

these proposals. The following is a 

summary of the public comments we 

received and our responses. 

Comment: One commenter suggested 

that CMS use hospital-specific section 

1115 supplemental payment data in 

measuring DSH targeting factors for 

diversion funds as the commenter was 

concerned that using averages would 

not encourage States to target DSH 

payments to the hospitals that need 

them the most. The commenter also 

added that CMS is statutorily required 

to collect hospital-specific data under 

section 1115 demonstrations in 

accordance with division CC, title II, 

section 202 of the CAA, 2021 (herein 

referred to as section 202). The 

commenter appears to be under the 

impression that the supplemental 

payment reporting requirement under 

section 202 applies to DSH payments. 

Response: We thank the commenter 

for the suggestion. However, this 

recommendation is outside the scope of 

the proposed rule, so implementing it 

would require further rulemaking. Our 

current regulations at § 447.294(e)(12) 

and (13) specify that DSH diversion 

amounts paid under a section 1115 

demonstration will receive average 

reduction amounts, for the respective 

State group (that is, low DSH and nonlow DSH), under the HMF and HUF. We 

did not propose to amend this aspect of 

§ 447.294(e)(12) and (13), so changes to 

this calculation are beyond the scope of 

this rule. Further, the detailed 

supplemental reporting required under 

section 202 would not apply to the 

demonstration year DSH diversion 

payments that we proposed to align 

with the SPRY DSH audit data for use 

in the DHRM for DSH allotment 

reductions for several years. The new 

reporting requirements in section 

1903(bb)(1)(B) of the Act, as amended 

by section 202 of the CAA 2021, do not 

apply to payments made before October 

1, 2021. We will calculate the statutorily 

required DSH allotment reductions 

utilizing the most recently available 

DSH audit information and will align 

amounts diverted under section 1115 

demonstrations with the SPRY of the 

DSH audit used in the DHRM. 

Therefore, the detailed supplemental 

payment reporting data required under 

section 202 will be available starting 

with the FY 2022, which would align 

with the SPRY 2022 DSH audit data. 

Given the timelines associated with the 

submission of the independent certified 

audit, which must be completed by 

September 30 of the year ending three 

years from the respective Medicaid 

SPRY and submitted to CMS by 

December 31 of that year, we could not 

utilize this required data any earlier 

than to calculate the DSH allotment 

reductions scheduled for FY 2027, the 

last year of currently scheduled DSH 

allotment reductions. As such, we 

would not have this reporting 

information available to calculate the 

DSH allotment reductions for FY 2024 

through FY 2026. Moreover, the HUF 

calculations require additional 

information which is not required under 

section 202 but that is available in the 

SPRY DSH audits. 

We are finalizing the provision as 

proposed, with a minor phrasing change 

to § 447.294(e)(12) replacing ‘‘pursuant 

to’’ with ‘‘in accordance with’’ to align 

with current style guidelines. 

C. Hospital-Specific Disproportionate 

Share Hospital Payment Limit 

(§ 447.295) 

From June 2, 2017 to October 1, 2021 

(the effective date of the CAA 2021), 

costs and payments for hospital services 

furnished to beneficiaries who were 

eligible for Medicaid, even when there 

was a third-party payer such as 

Medicare or other insurer that pays 

primary to Medicaid for inpatient and 

outpatient hospital services, would all 

be included in the calculation of 

Medicaid shortfall portion of the 

hospital-specific DSH limits in 

accordance with the ‘‘DSH Payments— 

Treatment of Third-Party Payers in 

Calculating Uncompensated Care Costs’’ 

final rule in the April 3, 2017, Federal 

Register. Since October 1, 2021, the 

amendments to section 1923(g) of the 

Act made by section 203 of the CAA 

2021 changed the methodology for 

calculating the Medicaid shortfall 

portion (Medicaid costs less Medicaid 

payments) of the hospital-specific DSH 

limit to only include costs and 

payments for hospital services furnished 

to beneficiaries for whom Medicaid is 

the primary payer. Additionally, the 

CAA 2021 amended section 1923(g)(2) 

of the Act to provide an exception for 

certain hospitals that are in the 97th 

percentile or above of all hospitals with 

respect to the number of Medicare SSI 

days (that is, inpatient days made up of 

patients who, for such days, were 

entitled to Medicare Part A benefits and 

to SSI benefits) or percentage of 

Medicare SSI days to total inpatient 


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days. In § 447.295(b), we proposed to 

add the definition of ‘‘97th percentile 

hospital’’ to mean a hospital that is in 

at least the 97th percentile of all 

hospitals nationwide with respect to the 

hospital’s number of Medicare SSI days 

or percentage of inpatient days that are 

Medicare SSI days, for the hospital’s 

most recent cost reporting period. For 

hospitals that meet this criteria, section 

1923(g)(2)(A) of the Act specifies that 

the hospital-specific DSH limit is the 

higher of the amount determined under 

the methodology as amended by section 

203 of the CAA 2021 or the amount 

determined under the methodology in 

effect on January 1, 2020 (described 

previously), which we proposed to 

implement in paragraph (3) of the 

definition of hospital-specific DSH limit 

calculation in § 447.295(d). As further 

discussed later in this section, we also 

proposed in the definition of 97th 

percentile hospital that CMS would 

identify the 97th percentile hospitals, 

for each Medicaid SPRY beginning on or 

after October 1, 2021, using Medicare 

cost reporting and claims data sources, 

as well as supplemental security income 

eligibility data provided by the Social 

Security Administration. We stated that 

we would publish lists identifying each 

97th percentile hospital annually in 

advance of October 1 of each year and 

would revise a published list only to 

correct a mathematical or other similar 

technical error that is identified to CMS 

during the one-year period beginning on 

the date the lists are published. 

We also explained in the preamble to 

the proposed rule that we interpreted 

these new requirements to be applicable 

for SPRYs ‘‘beginning on or after’’ 

October 1, 2021, the effective date of the 

CAA 2021. Previously, certain statutory 

references to ‘‘fiscal year,’’ such as in 

section 1923(g)(1) and (2) and (j)(1) of 

the Act, have also been interpreted as 

referring to each State’s SPRY, instead 

of the FFY, when establishing 

requirements for the hospital-specific 

DSH limit (and audit requirements to 

ensure that payments comply with 

hospital-specific DSH limits). In the 

2008 DSH audit final rule, CMS 

indicated that this interpretation was in 

‘‘recognition of varying fiscal periods 

between hospitals and States’’ and that 

‘‘[t]he Medicaid [SPRY] is the period 

which each State has elected to use for 

purposes of DSH payments and other 

payments made in reference to annual 

limits.’’ Further, we stated our belief 

that interpreting this provision to be 

applicable on an FFY basis would 

impose an excessive burden on States 

and hospitals. In particular, we 

explained our belief that such an 

interpretation would create a significant 

burden in situations when a hospital 

would qualify to meet the exception for 

97th percentile hospitals for a portion of 

its SPRY, but not for the full SPRY, if 

qualification were determined on the 

basis of the FFY. This result would be 

likely to occur, given that the majority 

of States have SPRYs that do not align 

with the FFY. In these instances, States 

would need to prorate the 

uncompensated care costs, for affected 

hospitals, within a SPRY accordingly 

since the methodology for calculating 

the Medicaid shortfall portion of the 

hospital-specific DSH limit may not be 

consistent for the entire SPRY if the 

hospital qualified as a 97th percentile 

hospital for only a portion of the SPRY. 

As such, we proposed that section 203 

of the CAA 2021, including the 97th 

percentile exception, be effective 

starting with each State’s first SPRY 

beginning on or after October 1, 2021. 

For example, if a State’s SPRY begins 

July 1, then the amendments made by 

section 203 of the CAA 2021 would be 

effective starting with the SPRY 

beginning July 1, 2022. Conversely, if a 

State’s SPRY begins each year on 

October 1, then such amendments 

would be effective starting with the 

SPRY beginning October 1, 2021. 

Hospitals meeting the definition of a 

97th percentile hospital, and therefore, 

qualifying for the 97th percentile 

exception will, by statute, calculate 

their hospital-specific DSH limit using 

the higher value of either the hospitalspecific DSH limit amount determined 

for the hospital under section 

1923(g)(1)(A) of the Act as amended by 

section 203 of the CAA 2021, or the 

amount determined for the hospital 

under section 1923(g)(1)(A) of the Act as 

in effect on January 1, 2020. Where 

section 1923(g)(2)(A)(ii) of the Act, as 

amended by section 203 of the CAA 

2021, refers to ‘‘the amount determined 

for the hospital under paragraph (1)(A) 

as in effect on January 1, 2020,’’ we 

interpret this to refer to the hospitalspecific limit calculation methodology 

that was in effect on January 1, 2020, 

and not the specific dollar amount that 

was applicable on that date. 

We proposed to revise § 447.295(d) to 

reflect the statutory changes made by 

section 203 of the CAA 2021 to update 

the methodology for the calculation of 

the hospital-specific DSH limit to only 

include costs and payments for hospital 

services furnished to beneficiaries for 

whom Medicaid is the primary payer. In 

addition, we proposed to revise 

§ 447.295(d) to specify the methodology 

that hospitals meeting the exception for 

97th percentile hospitals would utilize 

in the calculation of the hospitalspecific DSH limit. Specifically, in 

§ 447.295(d)(1), we proposed to specify 

that for each State’s Medicaid SPRYs 

beginning prior to October 1, 2021 and 

subject to proposed paragraph (d)(3), 

only costs incurred in providing 

inpatient hospital and outpatient 

hospital services to Medicaid 

individuals, and revenues received with 

respect to those services, and costs 

incurred in providing inpatient hospital 

and outpatient hospital services, and 

revenues received with respect to those 

services, for which a determination has 

been made in accordance with 

§ 447.295(c) that the services were 

furnished to individuals who have no 

source of third-party coverage for the 

specific inpatient hospital or outpatient 

hospital service are included when 

calculating the costs and revenues for 

Medicaid individuals and individuals 

who have no health insurance or other 

source of third-party coverage for 

purposes of section 1923(g)(1) of the 

Act. 

In § 447.295(d)(2), we proposed to 

specify the applicable costs and 

revenues associated with services 

furnished to Medicaid individuals and 

individuals who have no health 

insurance or other source of third-party 

coverage for purposes of determining 

the hospital-specific DSH limit under 

section 1923(g)(1) of the Act. We 

proposed that for each State’s first 

Medicaid SPRY beginning on or after 

October 1, 2021, and thereafter, subject 

to proposed paragraph (d)(3), only costs 

incurred in providing inpatient hospital 

and outpatient hospital services to 

Medicaid individuals when Medicaid is 

the primary payer for such services, and 

revenues received with respect to those 

services, would be included in the 

Medicaid shortfall portion of the 

hospital-specific DSH limit calculation. 

Furthermore, we proposed to specify 

that only costs and revenues for which 

a determination has been made in 

accordance with § 447.295(c) that the 

services were furnished to individuals 

who have no source of third-party 

coverage for the specific inpatient 

hospital or outpatient hospital service 

would be included in the uninsured 

shortfall portion of hospital-specific 

DSH limit calculation. 

As noted previously, we proposed to 

implement the 97th percentile hospital 

exception in proposed § 447.295(d)(3), 

which would specify that, effective for 

each State’s first Medicaid SPRY 

beginning on or after October 1, 2021, 

and thereafter, the hospital-specific DSH 

limit for a 97th percentile hospital 

defined in proposed paragraph (b) 

would be the higher of the values from 


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the calculations described in proposed 

paragraphs (d)(1) and (2). 

We also proposed to develop a data 

set (compiling cost report, claims, and 

eligibility data) to determine which 

hospitals, ranked on a national level, 

qualify to meet the statutory 97th 

percentile hospital exception. We 

proposed to publish these data for use 

in determining which hospitals qualify 

as a 97th percentile hospital on an 

annual basis, electronically or in 

another format as determined by CMS, 

prior to the SPRY to which the data 

would apply. We would determine 

which hospitals qualify as a 97th 

percentile hospital on an annual basis 

prior to each SPRY beginning on or after 

October 1. In this way, we explained 

that we would be able to qualify 

hospitals on the basis of SPRYs, while 

also accounting for non-alignment of 

SPRYs across States. Again, this would 

not be done on the basis of the FFY, but 

rather would be an annual process to 

qualify hospitals for each SPRY. We 

indicated that we would publish these 

data once a year, prior to October 1. 

Each State could then use these data to 

determine which hospitals qualify for 

the 97th percentile hospital exception 

for the State’s SPRY that begins between 

that October 1 and September 30 of the 

following calendar year. 

We proposed to determine a hospital’s 

qualification for the 97th percentile 

exception for each SPRY on a 

prospective basis. We explained our 

belief that this is a reasonable 

interpretation in that the statute 

specifically refers to the ‘‘most recent 

cost reporting period’’ in determining a 

hospital’s qualification ‘‘for the fiscal 

year,’’ which, as noted, we interpret to 

mean SPRY. That is, we believe it is 

reasonable to interpret the reference to 

the ‘‘most recent cost reporting period’’ 

in section 1923(g)(2)(B) of the Act to 

mean the most recent cost reporting 

period for which there is a cost report 

available before the beginning of the 

SPRY for which the 97th percentile 

hospitals are being identified. 

By applying this exception 

prospectively, we eliminate the need to 

retroactively rank and qualify hospitals 

based on actual Medicare SSI days and 

ratios for services furnished during the 

SPRY. This application would allow for 

States and hospitals to know prior to the 

beginning of the SPRY which hospitals 

qualify for the exception. That 

knowledge would allow States and 

hospitals to gauge how payments should 

be made and measured against hospitalspecific DSH limits and provide greater 

payment predictability than a 

retroactive application. We believe this 

interpretation to also be the most 

feasible from an operational standpoint 

for CMS, States, and hospitals. 

To compile this source of data, we 

explained that we would use data 

originating from various systems and 

sources, including the Healthcare Cost 

Report Information System (HCRIS) and 

Medicare Provider Analysis and Review 

(MEDPAR) files, and SSI eligibility data 

from the Social Security Administration 

(SSA). Utilizing HCRIS, we would 

identify the universe of hospitals that 

have filed a Medicare cost report and 

each hospital’s most recent cost 

reporting period, including acute care 

hospitals paid under the inpatient 

prospective payment system (IPPS), 

critical access hospitals, inpatient 

rehabilitation facilities, and inpatient 

psychiatric facilities. 

We explained that we would then 

determine each hospital’s Medicare SSI 

days for discharges occurring in the 

hospital’s most recent cost reporting 

period, regardless of the length of that 

cost reporting period, using a data set 

that combines MEDPAR claims data and 

SSI eligibility data. We would utilize 

Medicare SSI days for discharges 

occurring in the cost reporting period, 

rather than Medicare SSI days occurring 

within the cost reporting period because 

the MEDPAR data show the Medicare 

SSI day count for each inpatient stay as 

a whole. This approach is consistent 

with how Medicare uses these data to 

develop the Medicare SSI days ratios for 

Medicare DSH purposes. Section 

1886(d)(5)(F)(vi) of the Act, in 

describing the Medicare SSI percentage 

within the Medicare ‘‘disproportionate 

patient percentage,’’ refers to the 

‘‘number of such hospital’s patient days 

for such period.’’ Then, the 

implementing regulations at 42 CFR 

412.106 describe the Medicare SSI days 

used for Medicare DSH as patient days 

that ‘‘are associated with discharges that 

occur during that period.’’ This 

approach means if an inpatient stay 

begins in one cost reporting period but 

ends in the next cost reporting period, 

we would not count any of the inpatient 

stay’s days toward the day count for the 

first cost reporting period, but instead 

count all of this inpatient stay’s days 

toward the day count for the second cost 

reporting period. This approach does 

not favor the counting of days in one 

cost reporting period over others. On 

average, exclusion of days for inpatient 

stays that straddle between one cost 

reporting period and the hospital’s next 

cost reporting period would be offset by 

any inclusion of days for inpatient stays 

that straddle between that one cost 

reporting period and the hospital’s 

previous cost reporting period. 

Therefore, we can ensure we do not 

overinclude or underinclude Medicare 

SSI days for inpatient stays that straddle 

two cost-reporting periods. 

To determine each hospital’s 

percentage of Medicare SSI days to total 

inpatient days, we proposed that we 

would divide the Medicare SSI days by 

each hospital’s total inpatient days for 

that same cost reporting period from 

HCRIS to obtain a percentage. We would 

then compile two lists—one that ranks 

the hospitals based on the absolute 

number of Medicare SSI days and 

another that ranks them by the 

percentage of inpatient days that are 

Medicare SSI days, respectively. A 

hospital may qualify to meet the 97th 

percentile exception based on its 

rankings on either of the two lists. 

We proposed to utilize the Medicare 

SSI days and total inpatient days data to 

mathematically determine a threshold of 

acceptance to identify hospitals meeting 

the 97th percentile exception. The array 

includes either the values of Medicare 

SSI days or the percentage of inpatient 

days that are Medicare SSI days, for the 

universe of hospitals nationwide 

identified through this data process. For 

the Medicare SSI days, the 97th 

percentile threshold would be rounded 

to the nearest whole number, with x.5 

or higher rounded up, and less than x.5 

rounded down. Any hospital with 

Medicare SSI days for its most recent 

cost reporting period greater than or 

equal to the 97th percentile threshold 

would qualify as a 97th percentile 

hospital. For the percentage of inpatient 

days that are Medicare SSI days, all 

values would be rounded to the fourth 

decimal place (0.xxxx, alternatively 

stated as xx.xx percent), including each 

hospital’s own percentage and the 97th 

percentile threshold. Values of 0.xxxx5 

or higher would be rounded up, and less 

than 0.xxxx5 would be rounded down. 

Any hospital that has a percentage of 

total inpatient days that are Medicare 

SSI days from its most recent cost 

reporting period that is greater than or 

equal to the 97th percentile threshold 

would qualify as a 97th percentile 

hospital. We proposed that the ranking 

would be on a national level, as the 

statutory language under section 203 of 

the CAA 2021 refers to ‘‘97th percentile 

of all hospitals,’’ which we believe is 

most consistent with a national, rather 

than a State-level ranking. 

To follow the statutory requirement to 

utilize information from the most recent 

cost reporting period, we proposed to 

utilize each hospital’s most recent cost 

reporting period for which there is a 

filed cost report in HCRIS, at a 

particular point in time in advance of 

the SPRY to which the 97th percentile 

qualification would apply. A filed cost 


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10See Becerra v. Empire Health Found., for 

Valley Hosp. Med. Ctr., 142 S. Ct. 2354 (2022). 

report would first have an ‘‘as 

submitted’’ status in HCRIS, which 

subsequently would change to 

‘‘amended,’’ ‘‘settled without audit,’’ 

‘‘settled with audit,’’ or ‘‘reopened’’ 

status, which indicates a final report 

that was previously reopened and resettled. We considered utilizing the 

most recent settled cost reporting 

period, but we explained that we had 

determined that the use of the assubmitted cost report would result in 

the use of more current and more 

consistent reporting periods across 

hospitals, consistent with the statutory 

directive to rely on ‘‘the most recent 

cost reporting period.’’ Moreover, we 

explained that we had determined that 

the total inpatient days seldom change 

between the as-submitted and the 

settled cost reports. The total inpatient 

days count is the primary data element 

needed from the cost report in order for 

us to determine which hospitals meet 

the 97th percentile exception. However, 

if the most recent cost reporting period 

for which there is an as-submitted cost 

report happens to already have an 

amended cost report, a settled cost 

report, or a reopened cost report as of 

the date that CMS obtains data from 

HCRIS for use in determining which 

hospitals meet the 97th percentile 

hospital exception, we proposed that we 

would use the total inpatient day count 

from the amended cost report, settled 

cost report, or reopened cost report for 

that period because that is the most 

updated information available for that 

period. 

In the proposed rule, we described the 

cost report status changes, from the cost 

report’s initial submission to its 

potential reopening after settlement. 

Consistent with that expected workflow, 

when there is more than one cost report 

for a hospital for its most recent cost 

reporting period in the HCRIS database 

as of the snapshot date, we will select 

the latest cost report based on the 

following order of the cost report status 

codes as they appear in HCRIS, from 

earliest to latest: 1 (as submitted), 5 

(amended), 2 (settled without audit) or 

3 (settled with audit), 4 (reopened). If 

there happens to be both a ‘‘settled 

without audit’’ cost report record and a 

‘‘settled with audit’’ cost report record 

for a hospital for the same cost reporting 

period in the HCRIS database, we will 

determine the later of the two based on 

the date that record is processed into 

HCRIS, consistent with our stated 

intention to use the most up-to-date 

information available as of the snapshot 

date. We also noted that we have 

observed in rare cases that, for a given 

cost reporting period, a hospital may 

have one or more versions of the cost 

report (that is, ‘‘amended,’’ ‘‘settled 

without audit,’’ ‘‘settled with audit,’’ 

and/or ‘‘reopened’’) without having the 

initial version of the cost report (‘‘as 

submitted’’) in the HCRIS database as of 

the snapshot date. Regardless, as long as 

the cost reporting period is the most 

recent period for which a cost report 

record exists for the hospital in the 

HCRIS database, we will follow the 

sorting order described above in 

choosing the latest cost report from the 

relevant cost reporting period. 

We proposed to utilize both covered 

and non-covered Medicare Part A days 

when collecting data and calculating 

hospital percentiles. The statutory 

language in section 1923(g)(2)(B)(i) of 

the Act as modified by section 203 of 

the CAA 2021 specifically refers to 

patients who were entitled to benefits 

under part A of title XVIII. A patient’s 

status as entitled to benefits under part 

A of title XVIII does not depend on 

whether payment for a particular 

inpatient day was available under 

Medicare Part A payment principles, 

and a qualifying Medicare beneficiary 

remains entitled to benefits under Part 

A even if Medicare payment is not 

available with respect to a particular 

inpatient day.10 As such, we believe the 

calculations must include all Medicare 

Part A inpatient days, whether covered 

or non-covered. Further, this is 

consistent with CMS’ use of covered 

and non-covered days in the Medicare 

SSI days ratio calculations for Medicare 

DSH payment purposes under section 

1886(d)(5)(F)(vi)(I) of the Act, which 

describes a hospital’s inpatient days for 

patients who were entitled to benefits 

under part A of title XVIII and were 

entitled to SSI benefits under title XVI 

of the Act. 

Hospitals may provide acute inpatient 

hospital services, as well as other 

inpatient hospital services, in distinct 

part units of the hospital. The distinct 

part units of a hospital that provide 

inpatient hospital services, which are 

reported separately on the hospital’s 

Medicare cost report, are rehabilitation 

distinct part units and psychiatric 

distinct part units. We proposed to 

include all inpatient days for inpatient 

hospital services reported on each 

hospital’s Medicare cost report, 

including days furnished in distinct part 

units of the hospital that provide 

inpatient hospital services, for purposes 

of determining a hospital’s Medicare SSI 

days and total inpatient days. We note 

that Medicare pays for services 

furnished in these distinct part units 

under different payment systems from 

the acute care inpatient hospital 

services provided by the hospitals. 

However, for Medicaid purposes, the 

DSH uncompensated care costs of the 

hospital are inclusive of the costs of 

inpatient and outpatient hospital 

services furnished by the hospital, 

including those furnished in these 

distinct parts. Therefore, we believe the 

hospital’s Medicare SSI days and total 

inpatient days should be inclusive of 

these distinct part unit days and not 

limited to acute inpatient hospital days. 

In this final rule, we are also clarifying 

that days in which a swing bed in a 

hospital, including a critical access 

hospital, is used for skilled nursing 

facility or nursing facility services are 

not to be included in determining a 

hospital’s Medicare SSI days and total 

inpatient days, because those days are 

for nursing facility services rather than 

inpatient hospital services. 

In determining when we can begin to 

collect and assemble the necessary data 

prior to the beginning of each upcoming 

SPRY that begins on or after October 1 

each year, we proposed to use HCRIS 

data as it exists as of March 31, in 

advance of October 1 of that same 

calendar year. Using the HCRIS data as 

of March 31, we explained that we 

would identify each hospital’s most 

recent cost reporting period for which 

the hospital has an available cost report 

and also identify the total inpatient days 

from the latest cost report available for 

that most recent cost reporting period. 

We also proposed to use the latest 

available MEDPAR files and SSI 

eligibility data, as of the same March 31 

date, to determine the Medicare SSI 

days data that correspond to that same 

most recent cost reporting period for 

each hospital. 

For example, for the 97th percentile 

determination applicable to SPRYs 

beginning October 1, 2023, through 

September 30, 2024, (that is, SPRYs 

beginning during FFY 2024), we 

explained that we would determine a 

hospital’s most recent cost reporting 

period in which it has a cost report in 

HCRIS as of March 31, 2023. For 

instance, if a hospital’s most recent cost 

reporting period with a cost report in 

HCRIS as of March 31, 2023, is from 

July 1, 2021, to June 30, 2022, we would 

take the total inpatient day count from 

that cost report. Then we would utilize 

the MEDPAR files and SSI eligibility 

data available as of March 31, 2023, to 

determine the hospital’s Medicare SSI 

days for the discharges occurring in that 

same cost reporting period of July 1, 

2021, to June 30, 2022. 

We explained that using the most 

recently available data as of March 31 in 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13925 

advance of October 1 each year would 

allow us a reasonable 6-month 

timeframe to pull data from each of 

these data sources, address any 

potential data issues, complete the 

necessary compiling and calculations, 

perform any data integrity checks, 

determine the 97th percentile and the 

hospitals meeting the threshold based 

either on the Medicare SSI days or the 

percentage of total inpatient days that 

are Medicare SSI days, and make the 

results available prior to October 1. 

States would then have the 97th 

percentile results applicable to the 

State’s SPRY that begins between 

October 1 of that calendar year and 

September 30 of the following calendar 

year. The March 31 date would establish 

a snapshot for a point in time each year 

that is reasonably close to October 1 of 

that same calendar year that we would 

use to determine what is the ‘‘most 

recent’’ data available for application to 

the upcoming SPRYs, while allowing us 

sufficient time to process the data and 

make the results available before the 

start of those SPRYs. We want to make 

clear that the March 31 snapshot date is 

not the actual date we will be pulling 

the cost report data from HCRIS, but 

rather the date by which a cost report 

must be processed into HCRIS to be 

captured. Prospectively, we may pull 

the cost report data anytime over the 6 

months following the March 31 

snapshot date. Similarly, for the 

Medicare SSI days, we will use 

MEDPAR claims data with matched SSI 

eligibility data for claims processed 

through the March 31 snapshot date. 

Again, prospectively, we may pull the 

Medicare SSI days data from this 

MEDPAR snapshot for each hospital’s 

relevant cost reporting period anytime 

over the 6 months following the March 

31 snapshot date. Note, for the 97th 

percentile determination for SPRYs 

beginning during FFYs 2022, 2023, and 

2024, we are pulling the data at the time 

we are finalizing this rule, to allow for 

public release of the 97th percentile 

hospital lists shortly after the issuance 

of this final rule. 

Given the timing of this rulemaking 

and the October 1, 2021, effective date 

of the amendments made by section 203 

of the CAA 2021, we proposed to 

produce the 97th percentile hospital 

data for both SPRYs beginning during 

FFY 2022 and SPRYs beginning during 

FFY 2023 using the necessary Medicare 

SSI days and cost report information as 

it would have been available to us under 

the timelines in the proposed rule. For 

example, for the data necessary to 

determine hospitals meeting the 97th 

percentile exception for SPRYs 

beginning during FFY 2022, we 

proposed that we would obtain a 

snapshot of the HCRIS, MEDPAR, and 

SSI eligibility data as would have been 

available on March 31, 2021. 

While we proposed to include all 

hospitals that provide Medicaid-covered 

inpatient services and file a Medicare 

cost report in our data set, we noted that 

there would be circumstances resulting 

in some hospitals being omitted from 

the data set. We explained that we 

would begin gathering all necessary data 

after March 31 of each year, based on 

the data availability described 

previously, to develop the data set to 

rank and indicate which hospitals 

qualify to meet the 97th percentile 

hospital exception for each State’s 

upcoming SPRY that begins on or after 

October 1 of that year. In accordance 

with 42 CFR 413.24(f)(2), cost reports 

are generally due 5 months from the end 

of each hospital’s cost-reporting period. 

For example, a hospital with a cost 

reporting year end of September 30 

would generally be expected to file a 

cost report by the end of February the 

following year, while a hospital with a 

cost reporting year end of June 30 would 

generally be expected to file its cost 

report by the end of November of that 

year. However, we also wanted to build 

in a reasonable window for late filing 

and cost report processing into HCRIS. 

Therefore, we proposed to include in 

the data set any hospital that has filed 

a cost report dating back to at least 

September 30, 3 years prior to capture 

as many hospitals as possible in our 

data set. We explained that it is unlikely 

that there would be a delay greater than 

3 years from when a hospital’s cost 

report is generally due to when that cost 

report is captured in HCRIS. For 

example, when we begin the data 

development process for data available 

through March 2023, we would exclude 

a hospital from the data set that does not 

have a cost report in HCRIS from a cost 

reporting period ending by September 

30, 2020, or later. We proposed this 

cutoff to capture as many hospitals in 

our data set as possible, but to also 

prevent significant variability in the 

cost-reporting periods by excluding 

Medicare hospitals whose most recent 

cost-reporting period for which there is 

a cost report in HCRIS dates back more 

than 3 years. This cutoff is intended to 

help exclude hospitals that may be 

inactive or terminated from our data set. 

As noted earlier in this section, we 

also proposed to include in the data set 

only hospitals that file a Medicare cost 

report. Because the Medicare cost report 

data are the source of total inpatient 

days, it is necessary for a hospital to file 

a Medicare cost report to calculate a 

hospital’s Medicare SSI day as a 

percentage of total inpatient days. We 

explained that we cannot perform the 

calculations without this cost report 

information. Therefore, we proposed to 

include only hospitals that file a 

Medicare cost report in the data set. 

Section 1923(g)(2)(B) of the Act 

recognizes the necessity of the Medicare 

cost report for the implementation of the 

97th percentile exception by basing the 

qualification for the exception on the 

number or percentage of Medicare SSI 

days for the ‘‘most recent cost reporting 

period.’’ Therefore, we explained our 

belief that it is appropriate and 

consistent with the statutory 

requirements to include only these 

hospitals that have submitted Medicare 

cost reports in the data set for both 97th 

percentile exception lists. We noted that 

we did not anticipate this to be a 

problem, since any hospital serving 

Medicaid patients but that does not file 

a Medicare cost report, would not 

qualify for the 97th percentile hospital 

exception. In accordance with 

§ 413.24(f), Medicare-participating 

hospitals are required to file cost 

reports, which are generally due 5 

months after the close of each cost 

reporting period. In accordance with 

Medicare Provider Reimbursement 

Manual, Part II, Section 110, hospitals 

with no Medicare utilization do not 

need to file a cost report, and hospitals 

meeting low Medicare utilization 

thresholds may file a less than full cost 

report with limited information. 

Because a hospital would only qualify 

for the 97th percentile hospital 

exception with a relatively high volume 

of Medicare SSI days, a hospital with no 

or low Medicare utilization, and 

therefore, with no cost report or with a 

less than full cost report which would 

not have inpatient days data, would not 

qualify for the 97th percentile hospital 

exception. 

Given that we proposed to use 

snapshot cost report, claims, and 

eligibility data in advance of October 1 

each year to produce nationwide lists 

applicable for each State’s upcoming 

SPRY beginning on or after that October 

1, we proposed that we would not 

modify the 97th percentile qualification 

results based on a request by one or 

more individual hospitals (or by one or 

more States, with respect to one or more 

individual hospitals) to update or 

reconsider hospital cost report, claims, 

or eligibility data. The snapshot 

approach recognizes that, at a given 

point in time, a hospital’s most recent 

cost reporting period for which there is 

a cost report available in HCRIS, as well 

as the hospital’s number of total 


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13926 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

inpatient days as reported in that most 

recent cost report and number of 

Medicare SSI days as determined from 

MEDPAR and SSI eligibility data 

sources, may be subject to future 

revision. However, to determine 

qualification for the 97th percentile 

hospital exception, we must select a 

point in time to capture snapshot data, 

and the resulting lists must provide 

reasonable certainty to hospitals and 

States nationwide regarding which 

hospitals qualify for the exception. We 

do not believe it would be prudent or 

reasonable to continuously revisit the 

97th percentile hospital qualifications 

based on changing cost report, claims, 

or eligibility data, outside of the 

snapshot parameters established in this 

final rule. 

Nonetheless, we recognized in the 

proposed rule that there is a possibility 

of a mathematical or other similar 

technical error by CMS that could lead 

to a misidentification of the hospitals 

that qualify for the 97th percentile 

exception. In such a circumstance, we 

noted our belief that it would be 

appropriate for us to correct our error, 

recognizing that this could result in 

some hospitals being determined 

eligible for the 97th percentile hospital 

exception that previously (erroneously) 

were not so listed, and other hospitals 

losing their previous (erroneous) 

designation as qualifying for the 

exception. At the same time, we 

observed that we must balance this 

consideration with the recognition that 

the published lists will be relied upon 

by States and hospitals for identifying 

which hospitals qualify for the 

exception, hospital-specific limits will 

be set accordingly, and DSH payments 

will be made; all interested parties 

(including hospitals, the States, and 

CMS) have an interest in finality for 

these payments after a reasonable time. 

Accordingly, we proposed to allow 1 

year from the posting of the 97th 

percentile hospital lists for States, 

hospitals, CMS, or other interested 

parties to identify any mathematical or 

other similar technical error made by 

CMS, according to instructions that 

would appear on the published lists. 

Upon CMS verification that an error 

occurred that affected the hospitals 

appearing on a list of 97th percentile 

hospitals for a given year, we would 

determine and publish a revised list as 

soon as practicable. We noted our belief 

that 1 year is a reasonable timeline for 

identifying any mathematical or other 

similar technical error made by CMS 

and would also allow a corrected 

qualifying list to be available in advance 

of the start of the independent DSH 

audit for the respective SPRY in most 

instances. For example, if we publish 

the qualifying lists in 2023 for 

application retroactively to a SPRY that 

begins October 1, 2021 (that is, SPRY 

2022), we would post a corrected 

qualifying list, if necessary, sometime in 

2024. Then, when the independent 

audit is performed for that SPRY in 

2025, the final 97th percentile 

qualification lists would be available 

and not subject to any further changes. 

Accordingly, in paragraph (2) of the 

proposed definition of 97th percentile 

hospital in § 447.295(b), we proposed 

that CMS would publish lists 

identifying each 97th percentile hospital 

annually in advance of October 1 of 

each year. We proposed that CMS 

would revise a published list only to 

correct a mathematical or other similar 

technical error made by CMS that is 

identified to CMS during the one-year 

period beginning on the date the list is 

published. 

We proposed that the effective date 

for this and other CAA 2021-related 

proposals, noted in the respective 

sections, be applicable to fiscal years 

beginning on or after October 1, 2021, to 

align with the effective date of the CAA 

2021. 

We received public comments on 

these proposals. The following is a 

summary of the public comments we 

received and our responses. 

Comment: Many commenters 

expressed opposition to the statutory 

changes required under section 203 of 

the CAA 2021. Commenters expressed 

concerns regarding the financial impact 

to hospitals that anticipated decreases 

in the hospital-specific DSH limits will 

have on hospitals and their ability to 

provide services. Two commenters 

indicated that the exception for 97th 

percentile hospitals was not adequate to 

protect financially vulnerable hospitals. 

A commenter indicated that they 

believe the 97th percentile threshold is 

arbitrary. Another commenter expressed 

the opinion that the methodology 

specified under section 203 of the CAA 

2021 incorrectly assumes that hospitals 

receive the entirety of a Medicare or 

Medicaid payment rate, and explained 

that, due to how a particular State may 

limit Medicaid payment of Medicare 

cost sharing amounts, hospitals are not 

paid the full payment for care provided 

to patients dually eligible for Medicare 

and Medicaid. A commenter noted the 

projected financial loss that would be 

incurred under the new methodology in 

which costs and payments for Medicaid 

patients are counted only for 

beneficiaries for whom Medicaid is the 

primary payer for hospitals that care for 

a high number of Medicaid/SSI-eligible 

beneficiaries with complicated health 

care needs. The commenter pointed out 

that many of those Medicaid eligible 

individuals who are disabled will also 

become eligible for Medicare after a 2- 

year waiting period, making the costs 

associated with their care ineligible for 

inclusion in the new hospital-specific 

DSH limit calculation. Commenters 

urged CMS to monitor the financial 

impacts to hospitals and to work with 

Congress to mitigate the potential 

negative effects of section 203 of the 

CAA 2021. 

Response: We appreciate the impact 

that the statutory changes made by 

section 203 of the CAA 2021 may have 

on hospitals. States’ policies for 

Medicaid payment of Medicare cost 

sharing amounts for dually eligible 

beneficiaries do vary, and we 

acknowledge that there could be 

uncompensated care costs after all 

applicable Medicare and Medicaid 

payments; with the statutory changes, 

such uncompensated care costs would 

not be included in the hospital-specific 

DSH limit to the extent that Medicare, 

not Medicaid, is the primary payer of 

such services. However, we are required 

by statute to implement the new 

methodology for determining hospitalspecific DSH limits, including the 

exception for 97th percentile hospitals, 

as specified under section 1923(g) of the 

Act. We do note that, despite the 

statutory changes made by section 203 

of the CAA 2021, there remains 

considerable flexibility for States in 

setting DSH State plan payment 

methodologies to the extent that these 

methodologies are consistent with 

section 1923(c) of the Act and all other 

applicable statutes and regulations. 

However, we intend to continue to 

monitor the financial impact that these 

statutory changes have on hospitals and 

provide information and technical 

assistance as Congress may request, as 

necessary to address any negative 

impact on providers. 

Comment: Several commenters 

expressed support for the proposals to 

implement the amendments made by 

section 203 of the CAA 2021, to the 

hospital-specific DSH limit calculations 

for the Medicaid shortfall calculation to 

include only Medicaid costs and 

payments when Medicaid is the primary 

payer. One commenter commended 

CMS for engaging in rulemaking to 

address the statutory requirements. 

Response: We appreciate the support. 

Comment: Several commenters 

requested clarification regarding how 

CMS defines ‘‘primary payer’’ and when 

Medicaid is considered to be the 

primary payer for inpatient and 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13927 

11See discussion at pages 20–22 of the 

Coordination of Benefits and Third-Party Liability 

In Medicaid Handbook: 2020, available at: https:// 

www.medicaid.gov/sites/default/files/2020-08/COBTPL-Handbook.pdf. 

12 88 FR 11865 at 11688. 

13 79 FR 71679. 

14 79 FR 71679 at 71683. 15 79 FR 71679 at 71682. 16 79 FR 71679 at 71683. 

outpatient hospital services provided to 

Medicaid beneficiaries. 

Response: This rule does not change 

existing rules related to Medicaid’s 

status as primary payer for a particular 

service. This rule addresses the 

calculation of hospital-specific limits as 

amended by section 203 of the CAA 

2021. This limits the Medicaid shortfall 

to the costs and payments associated 

with inpatient and outpatient services 

where Medicaid is the primary payer, 

providing an exception for 97th 

percentile hospitals. We will continue 

to rely on existing rules governing third 

party liability and when Medicaid is a 

primary payer, such as those at section 

1902(a)(25)(A) of the Act and §§ 433.135 

through 433.154. Medicaid is generally 

the ‘‘payer of last resort,’’ meaning that 

Medicaid only pays claims for covered 

items and services if there are no other 

liable third-party payers for the same 

items and services, which concept is 

implied in the above statute and 

regulations.11

In the proposed rule, we also stated 

that for purposes of calculating the 

hospital-specific DSH limit, section 203 

of the CAA modified the calculation of 

the Medicaid portion of the hospitalspecific DSH limit to include only costs 

and payments for services furnished to 

beneficiaries for whom Medicaid is the 

primary payer for such services, as 

specified in section 1923(g)(1)(B)(i) of 

the Act.12 Accordingly, the limit 

generally excludes costs and payments 

for services provided to Medicaid 

beneficiaries with other sources of 

coverage, including Medicare and 

commercial insurance. Through 

previous rulemaking, we established, for 

the purpose of the hospital-specific DSH 

limit, how to determine whether third 

party coverage exists for a hospital 

service. In the December 3, 2014, 

Federal Register, CMS published the 

final rule entitled ‘‘Medicaid Program; 

Disproportionate Share Hospital 

Payments—Uninsured Definition’’ 

(Uninsured Rule).13 In that final rule, 

we indicated that we would apply a 

single, service-specific determination of 

third-party coverage status for an entire 

hospital service for purposes of 

hospital-specific DSH limit 

calculations.14 While the Uninsured 

Rule focused on the determination of 

whether an individual is insured for a 

particular hospital service, the statutory 

changes made by section 203 of the 

CAA now call for a similar, single, 

service-specific determination to be 

made with respect to services provided 

to individuals with Medicaid coverage, 

to ascertain whether Medicaid is the 

primary payer for the service. 

Before the statutory amendments 

made by section 203 of the CAA 2021, 

section 1923(g)(1)(A) of the Act 

included in the Medicaid shortfall 

portion of the hospital-specific DSH 

limit calculation costs and payments of 

individuals ‘‘eligible for medical 

assistance under the State plan.’’ As 

discussed in the Uninsured Rule, costs 

and payments associated with the 

provision of inpatient and outpatient 

hospital services for all Medicaid 

eligible individuals would have been 

captured in the Medicaid shortfall 

portion of the calculation, regardless of 

whether that individual’s Medicaid 

benefit was exhausted, or a Medicaid 

coverage limit had been reached for the 

associated inpatient or outpatient 

hospital service.15 Similarly, due to the 

previous statutory language indicating 

that individuals need only to have 

Medicaid eligibility without regard to 

Medicaid coverage for the particular 

service, inpatient and outpatient 

hospital services for Medicaid eligible 

individuals should have been captured 

in the Medicaid shortfall, even where 

the individual’s Medicaid benefits were 

limited and did not extend to inpatient 

or outpatient hospital services at all. 

Because the individual was eligible for 

some Medicaid coverage during the 

service period, the individual would 

have been included in the Medicaid 

shortfall portion of the hospital-specific 

DSH limit, not in the uninsured 

shortfall portion. 

However, section 1923(g)(1)(B)(i) of 

the Act, as amended by section 203 of 

the CAA 2021, now specifies that the 

Medicaid shortfall portion of the 

hospital-specific DSH limit will be 

limited to costs and payments of 

furnishing hospital services to 

‘‘[i]ndividuals who are eligible for 

medical assistance under the State plan 

or under a waiver of such plan and for 

whom the State plan or waiver is the 

primary pay[e]r for such services.’’ We 

interpret the statutory change specifying 

that Medicaid must be the primary 

payer ‘‘for such services’’ to direct a 

service-specific approach to 

determining Medicaid’s status as 

primary payer, consistent with how, 

under the Uninsured Rule, we 

determine an individual’s status as 

uninsured for a particular hospital 

service. 

Following the service-specific 

approach to determining an individual’s 

insured status as outlined in the 

Uninsured Rule,16 to similarly 

determine whether Medicaid is the 

primary payer for a given hospital 

service furnished to a Medicaid 

beneficiary, the beneficiary must have 

Medicaid coverage for the hospital 

service, and there must not be any thirdparty coverage that is primary for the 

particular hospital service, and 

Medicaid must be the primary payer for 

the service. When Medicaid is 

determined to not be the primary payer 

for that service, then the associated 

costs and payments for that specific 

hospital service would not be included 

in the calculation of the hospitalspecific DSH limit (unless so provided 

for a qualifying hospital under the 97th 

percentile exception). 

Comment: One commenter questioned 

whether Medicaid would be considered 

the primary payer or if a patient would 

be considered uninsured if the patient 

has some Medicaid coverage but does 

not have Medicaid coverage for the 

particular inpatient and outpatient 

hospital services. 

Response: As discussed previously in 

this final rule, only costs and payments 

for inpatient and outpatient hospital 

services for which Medicaid is the 

primary payer under a single, servicespecific determination can be included 

in the Medicaid shortfall portion of the 

hospital-specific DSH limit. 

Specifically, the statute now requires 

that Medicaid be the ‘‘primary pay[e]r 

for such services’’ (meaning ‘‘hospital 

services’’ as stated in section 

1923(g)(1)(A)(i) of the Act) furnished to 

an individual eligible under the 

Medicaid State plan or waiver, for costs 

and payments associated with the 

services to be included in the Medicaid 

shortfall portion of the hospital-specific 

DSH limit calculation. Medicaid would 

not be considered the primary payer for 

hospital services, for purposes of the 

calculation of the hospital-specific DSH 

limit, for an individual who had 

Medicaid coverage for inpatient and/or 

outpatient hospital services but had 

reached coverage limits or otherwise 

exhausted the Medicaid hospital benefit 

prior to obtaining these services. As a 

result, such an individual, as long as 

there is not third-party coverage for the 

inpatient and/or outpatient hospital 

services, would be considered 

uninsured for those hospital services 

and the associated costs and payments 

would be captured in the uninsured 

portion of the hospital-specific DSH 

limit calculation. Similarly, the costs 


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13928 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

17 79 FR 71679 at 71683. 

18 79 FR 71679 at 71691. 

19 Id. 

and payments associated with the 

provision of hospital services provided 

to an individual with a limited 

Medicaid benefit package, which does 

not cover such inpatient and/or 

outpatient hospital services, would also 

be captured in the uninsured portion of 

the hospital-specific DSH limit 

calculation, provided they do not have 

third-party coverage for such services. 

Hospitals qualifying to meet the 

exception for 97th percentile hospitals 

would calculate the hospital-specific 

limit that is the higher value of that 

calculated under the methodology in 

which costs and payments for Medicaid 

patients are counted in the Medicaid 

shortfall calculation only for services 

furnished to beneficiaries for whom 

Medicaid is the primary payer, or the 

methodology in effect on January 1, 

2020. 

For purposes of the methodology in 

effect on January 1, 2020, costs and 

payments associated with the universe 

of Medicaid eligible individuals would 

be captured in the Medicaid portion of 

the hospital-specific DSH limit 

calculation regardless of whether or not 

the individual had Medicaid coverage 

for inpatient and/or outpatient hospital 

services and regardless of whether any 

such coverage had been exhausted. We 

note that while the change in policy as 

a result of the amendments made by 

section 203 of the CAA 2021 results in 

different treatment of some Medicaid 

eligible individuals for purposes of 

calculating hospital-specific DSH limits 

(based on whether the individual’s 

Medicaid benefits include coverage of 

inpatient and/or outpatient hospital 

services, and whether the individual’s 

Medicaid benefits for hospital services 

have been exhausted or coverage limits 

have been reached), this change does 

not affect the costs and payments 

captured in hospital-specific DSH limit 

calculations overall, provided that the 

individual has no other health 

insurance or other source of third-party 

coverage for inpatient and/or outpatient 

hospital services, as relevant. Rather, 

the change merely affects whether 

particular costs and payments are 

captured in the Medicaid or uninsured 

shortfall portion of the hospital-specific 

DSH limit calculation. 

Comment: Some commenters had 

specific questions regarding who is 

considered the primary payer in cases 

involving dually eligible individuals 

when coverage limits, whether through 

Medicare or private insurance, have 

been reached or have otherwise been 

exhausted. Commenters inquired about 

the scenarios when third-party coverage 

has reached its limit or is exhausted 

prior to an individual obtaining an 

inpatient or outpatient hospital service 

versus when the third-party insurer’s 

coverage limit is reached, or coverage 

otherwise exhausted at some point 

during the provision of the service. One 

commenter questioned if Medicaid 

would be considered the primary payer 

for patients residing in an institution for 

mental diseases who are dually eligible 

for Medicare and Medicaid whose 

Medicare benefits are exhausted during 

the stay. Commenters questioned 

whether Medicaid actually has to pay 

on the claim for Medicaid to be 

considered the primary payer. 

Response: As discussed in the 

Uninsured Rule, we determine whether 

an individual is insured for a particular 

service based on whether that 

individual has third party coverage for 

the single, specific inpatient hospital 

service, regardless of whether that 

individual was insured for the full 

service or service period or only a 

portion (for example, due to coverage 

limits being reached or coverage 

otherwise exhausted).17 In the 

Uninsured Rule, we explained that the 

single, service-specific approach means, 

for the purpose of the hospital-specific 

DSH limit, third party coverage is 

determined for a given hospital stay, 

without separating the component parts 

of the inpatient hospital services of that 

hospital stay. The single, servicespecific approach also applies here to 

determine whether Medicaid is the 

primary payer for a particular hospital 

stay; we will look to whether there is 

third party coverage that pays primary 

over Medicaid for the inpatient hospital 

services of the stay. For example, if an 

individual has Medicare or private 

insurance that only provided coverage 

for the first 5 out of 10 days of a hospital 

inpatient stay (whether in a hospital 

that is an institution for mental diseases 

or not), Medicaid would not be 

considered the primary payer for any 

portion of that inpatient stay, even after 

the Medicare or private insurance 

coverage limit has been reached in the 

middle of the stay. However, if the 

dually eligible individual is either not 

insured for or has exhausted their 

Medicare or other third-party coverage 

prior to obtaining the inpatient or 

outpatient hospital service, Medicaid 

may be considered the primary payer for 

such services because there is no thirdparty coverage that pays primary over 

Medicaid for the particular stay. As we 

stated in the Uninsured Rule, services 

beyond health insurance coverage 

limits, including annual lifetime limits, 

will not be considered to be within a 

covered benefit package.18 We note that 

real-life cases can be much more 

complex, and that States and providers 

should refer to existing third party 

liability rules and policies, such as 

section 1902(a)(25)(A) of the Act and 

§§ 433.135 through 433.154, when 

determining third-party liability, and to 

existing DSH rules and policies such as 

those described in the Uninsured Rule 

to determine how each case should be 

evaluated for third party coverage for 

the purpose of the hospital-specific DSH 

limit. Finally, as we stated in the 

Uninsured Rule, the determination of 

which payer is primary with respect to 

a single, specific hospital service is 

based on the existence of coverage and 

does not depend on the hospital 

receiving payment from a particular 

payer.19

Comment: Some commenters inquired 

about the treatment of third-party 

payments related to services provided to 

Medicaid eligible individuals. Some 

commenters wanted to know whether a 

claim associated with a Medicaid 

eligible individual should have thirdparty payments removed or if the entire 

claim should not be considered in the 

calculation of the hospital-specific DSH 

limit. One commenter requested that 

CMS provide an example of a thirdparty payment associated with services 

furnished to a beneficiary with 

Medicaid as primary payer. 

Additionally, commenters inquired 

about cases where an individual had no 

Medicare Part A coverage but had 

certain charges covered and paid by 

Medicare Part B during an inpatient 

stay. Similarly, commenters also 

inquired if Medicaid would be 

considered the primary payer for an 

inpatient stay in cases where the 

individual has third-party coverage for 

ancillary services but no coverage for 

routine inpatient hospital services, 

inquiring whether the inpatient routine 

portion of the stay would be includable 

in the Medicaid shortfall calculation of 

the hospital-specific DSH limit. 

Commenters questioned whether the 

individuals in these scenarios would be 

considered to have third party coverage, 

be uninsured, or if Medicaid could be 

considered the primary payer for these 

inpatient hospital services. 

Response: As discussed previously, 

based on section 1902(a)(25)(A) of the 

Act and §§ 433.135 through 433.154, 

Medicaid is generally the payer of last 

resort. In general, an individual who has 

third-party coverage for inpatient 

hospital services provided during a 

hospital stay, with very limited 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13929 

20See, for example, 42 U.S.C. 300ff–15(a)(6), 42 

U.S.C. 300ff–27(b)(7)(F), 42 U.S.C. 300ff–64(f), 42 

U.S.C. 300ff–71(i). See also discussion at pages 20– 

22 of the Coordination of Benefits and Third-Party 

Liability In Medicaid Handbook: 2020, available at 

https://www.medicaid.gov/sites/default/files/2020- 

08/COB-TPL-Handbook.pdf. 

21The Medicare Provider Reimbursement 

Manual, Part I, Section 2202.6 defines ‘‘routine 

services’’ as, ‘‘Inpatient routine services in a 

hospital or skilled nursing facility generally are 

those services included in by the provider in a daily 

service charge—sometimes referred to as the ‘‘room 

and board’’ charge. Routine services are composed 

of two board components: (l) general routine 

services, and (2) special care units (SCU’s), 

including coronary care units (CCU’s) and intensive 

care Units (ICU’s). Included in routine services are 

the regular room, dietary and nursing services, 

minor medical and surgical supplies, medical social 

services, psychiatric social services, and the use of 

certain equipment and facilities for which a 

separate charge is not customarily made.’’ 

22The Medicare Provider Reimbursement 

Manual, Part I, Section 2202.8 defines ancillary 

services as, ‘‘Ancillary services in a hospital or SNF 

include laboratory, radiology, drugs, delivery room 

(including maternity labor room), operating room 

(including postanesthesia and postoperative 

recovery rooms), and therapy services (physical, 

speech, occupational). Ancillary services may also 

include other special items and services for which 

charges are customarily made in addition to a 

routine service charge.’’ 

exceptions, would be considered to 

have third-party coverage that is 

primary over Medicaid for the inpatient 

hospital services. Under the single, 

service-specific determination, we do 

not separate out components of the 

inpatient hospital services furnished 

during a particular inpatient stay. As 

such, when it is determined that there 

is third-party coverage for inpatient 

hospital services that is primary over 

Medicaid for a particular inpatient stay, 

none of the inpatient hospital service 

costs and payments associated with this 

inpatient stay, including third-party 

payments, may be included in the 

Medicaid shortfall calculation of the 

hospital-specific DSH limit. 

Under existing third-party liability 

rules, there are limited exceptions to the 

general rule that Medicaid is the payer 

of last resort, and these exceptions 

typically apply to federally 

administered health programs. For a 

federally administered health program 

to be an exception to the general status 

of Medicaid as the payer of last resort, 

the statute creating the program must 

expressly state that it pays for a service 

after Medicaid, such as the Ryan White 

Fund under 42 U.S.C. 300ff et seq.20 If 

those other programs that are exceptions 

to the general status of Medicaid as the 

payer of last resort do cover and make 

payment for the same inpatient hospital 

services that Medicaid is the primary 

payer for, then such payments from the 

other programs would be treated as cost 

offsets when the costs and payments of 

the inpatient hospital services are 

included in the calculation of the 

Medicaid shortfall. This is an example 

of third-party payments associated with 

services furnished to a beneficiary with 

Medicaid as the primary payer. 

However, commenters also 

specifically inquired about unique 

circumstances where, in addition to 

Medicaid, a hospital inpatient has 

Medicare Part B only (that is, the patient 

is not also entitled to or enrolled in 

Medicare Part A, or has already 

exhausted their Medicare Part A 

benefits), which pays for limited 

services in certain circumstances for a 

beneficiary who is an inpatient, or has 

other third-party coverage that is only 

for ancillary services. In general, we 

consider ancillary services to be services 

provided by a hospital that are separate 

from routine services 21 such as room 

and board, nursing, and support 

services; ancillary services may include 

x-ray, drug, laboratory, or other services, 

associated with an inpatient hospital 

stay.22

Regardless of whether the ancillary 

services are covered by Medicare Part B 

or another third-party payer, such as a 

private insurance policy, we will defer 

to States to determine whether that 

third-party coverage is considered 

coverage for inpatient hospital services. 

The Medicare program generally is 

structured to pay for inpatient hospital 

services under Part A, see section 

1812(a)(1) of the Act, whereas Part B 

generally pays for specified services 

other than inpatient hospital services, 

see section 1832 of the Act. Given this 

structure, even where a beneficiary with 

Medicaid and Medicare Part B only 

coverage has payment made on their 

behalf by Part B for ancillary services 

that fall within the State’s Medicaid 

definition of inpatient hospital services 

during an inpatient hospital stay, we 

believe that the State reasonably could 

determine that Medicaid—not Medicare 

Part B—will be considered to be the 

primary payer for the inpatient hospital 

stay. This approach would avoid a 

potentially anomalous outcome where 

Medicaid would pay for the majority of 

services, but a small Medicare Part B 

payment for an ancillary service would 

result in the exclusion of all costs and 

payments for the stay from the hospitalspecific DSH limit. 

Regarding the comment inquiring 

about other third-party coverage that 

only pays for ancillary services but not 

routine services, we do not have enough 

information about who this payer would 

be or what it would cover to give 

guidance on whether that third-party 

coverage would be regarded as coverage 

for inpatient hospital services and 

therefore would be considered primary 

to Medicaid. Again, in this case, we will 

defer to the State to make a reasonable 

determination of whether such thirdparty coverage provides coverage for 

inpatient hospital services that will be 

considered to be the primary payer for 

the inpatient hospital stay. 

In this scenario, whether the payer in 

addition to Medicaid is Medicare Part B 

or another third-party payer, we further 

note that since individuals have 

coverage for inpatient hospital services 

(whether Medicaid, Medicare, or 

another third party), they would not be 

considered uninsured for purposes of 

inclusion in the hospital-specific DSH 

limit. As mentioned, we acknowledge 

that, where a State does determine that 

Medicare Part B or another third-party 

payer is the primary payer for inpatient 

hospital services where it only makes 

payments for ancillary services 

furnished during the stay, the inpatient 

hospital service costs and payments for 

the entire inpatient stay would be 

excluded from the hospital-specific DSH 

limit, and this could result in the 

exclusion of some Medicaid costs and 

payments. We will monitor for State 

handling of these scenarios once the 

rule is in effect to ascertain whether the 

rule is resulting in unexpected 

outcomes, and we may undertake 

additional rulemaking in the future if 

necessary to address the issue. 

Comment: One commenter inquired 

about the 2008 DSH audit final rule and 

associated protocol’s instructions to use 

MMIS paid claims data. The commenter 

questioned whether States now will be 

required to change their MMIS systems 

to provide reports that remove the 

Medicaid ‘‘no-pays’’ for the DSH audits 

where there is a third-party payer. 

Response: For any State plan rate year 

beginning or after October 1, 2021, 

States and hospitals must have 

procedures in place to ensure the 

Medicaid data used in the hospitalspecific DSH limit calculation complies 

with the amendments made by section 

203 of the CAA 2021 by determining 

when Medicaid is the primary payer for 

inpatient and outpatient hospital 

services. While the General DSH Audit 

and Reporting Protocol released with 

the 2008 DSH audit final rule does call 

for MMIS to be the source of Medicaid 

fee for service utilization and payment 

data, CMS is not specifically requiring 

any changes to MMIS to implement the 

amendments made by section 203 of the 

CAA 2021 or the provisions of this final 

rule. We generally would expect States’ 

current MMIS would have the ability to 

support compliance with the 


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13930 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

23 42 CFR 455.304(d)(2). 

24 88 FR 11865 at 11870. 

requirements. However, States with 

legacy systems may require some 

configuration changes. For States that 

require MMIS system changes, CMS is 

available to work with them. To the 

extent that MMIS data on its own is not 

sufficient to identify Medicaid data 

needed to calculate the hospital-specific 

DSH limit, States are able to supplement 

MMIS data with other auditable data. 

Comment: One commenter inquired 

about provisions of the February 28, 

2023, proposed rule entitled ‘‘Medicare 

Program; Medicare Disproportionate 

Share Hospital (DSH) Payments: 

Counting Certain Days Associated With 

Section 1115 Demonstrations in the 

Medicaid Fraction’’ (88 FR 12623). The 

commenter referenced statements by 

CMS indicating that section 1115 

demonstration waivers that provide 

health insurance or premium coverage 

for inpatient hospital services will be 

included in Medicaid days for Medicare 

DSH calculations. As such, the 

commenter questioned if CMS considers 

coverage provided under these section 

1115 demonstrations for inclusion in 

the Medicaid hospital-specific DSH 

limit calculations. 

Response: We note the Medicare DSH 

program and the Medicaid DSH program 

are separate programs authorized by 

different sections of the statute and with 

different purposes and goals. However, 

as stated in the February 2023 proposed 

rule, which appeared in the February 

24, 2023, Federal Register (88 FR 

11865) if an individual receives health 

insurance for inpatient hospital care 

directly provided by a section 1115 

demonstration, or if a patient buys 

insurance for inpatient hospital care 

with premium assistance provided by a 

section 1115 demonstration for which 

the demonstration pays 100 percent of 

the premium cost to the individual, and 

in either case the cost of the insurance 

or premium assistance is paid for with 

title XIX dollars, the individual is 

regarded as eligible for Medicaid under 

the Medicare DSH statute. Similarly, 

this individual would be considered a 

Medicaid eligible individual for 

Medicaid DSH purposes. As such, costs 

and payments associated with covered 

inpatient and outpatient hospital 

services provided to this individual may 

be considered in the calculation of the 

hospital-specific DSH limit, depending 

on the determination of primary payer 

status and the provisions of section 

1923(g) of the Act. 

Comment: Two commenters 

expressed support of our proposal of the 

October 1, 2021, effective date of the 

amendments to section 1923(g) of the 

Act made by section 203 of the CAA 

2021, to be applicable for SPRYs 

beginning on or after the October 1, 

2021, effective date. One commenter 

stated that the plain language of the law 

indicated that the effective date should 

apply to services furnished on or after 

October 1, 2021. One commenter 

requested that CMS confirm whether the 

application of the amendments to 

section 1923(g) of the Act made by 

section 203 of the CAA 2021 will apply 

on the basis of the Federal fiscal year or 

the SPRY. The commenter also urged 

CMS to allow an effective date prior to 

October 1, 2021, by applying the 

statutory changes to cost reporting 

periods beginning on or before the 

October 1, 2021, date and rebasing DSH 

using FY 2021 cost reports. This 

commenter stated that this application 

would allow for a consistent way to 

gauge how hospital systems benefited 

from the DSH program. The commenter 

also indicated that CMS should be 

cognizant of the difference in State-toState distribution of DSH funds. 

Response: We appreciate the 

commenters’ support of our effective 

date proposal and disagree with the 

other commenter that our interpretation 

conflicts with the plain language of the 

statute. To align the statutory 

amendments made by section 203 of the 

CAA 2021 with how the Medicaid DSH 

program has been historically 

operationalized across States, we 

proposed to interpret the October 1, 

2021, effective date to apply the 

statutory changes to SPRYs beginning 

on or after October 1, 2021. As 

discussed in the proposed rule and 

earlier in this final rule, this is 

consistent with past interpretations of 

statutory provisions that have been 

codified in rulemaking, such as in the 

2008 DSH final rule, and further 

explained in sub-regulatory guidance. 

Moreover, CMS does not have the 

statutory authority to apply the effective 

date of the amendments made by 

section 203 of the CAA 2021 to periods 

before October 1, 2021. These 

provisions do not ‘‘rebase’’ DSH 

payments, per se, but rather change the 

definition of the hospital-specific limit 

for DSH payments. 

We do not agree with the comment 

that changing the effective date to 

coincide with hospitals’ cost reporting 

periods would provide a consistent 

view of how each hospital system 

benefits from DSH. We acknowledge 

that hospital cost reports, and internal 

audits of such cost reports, may not 

align with the State’s SPRY. However, 

the DSH independent certified audit 

requirement at section 1923(j) of the 

Act, as implemented in the 2008 DSH 

final audit rule, requires States to 

conduct an audit of their DSH programs 

and identify DSH payments made 

against hospital-specific DSH limits on 

the basis of each State’s SPRY.23 As we 

indicated in the proposed rule, this was 

in ‘‘recognition of varying fiscal periods 

between hospitals and States’’ and that 

‘‘[t]he Medicaid [SPRY] is the period 

which each State has elected to use for 

purposes of DSH payments and other 

payments made in reference to annual 

limits.’’ 24 We believe that the DSH 

independent certified audit, which 

within each State looks at all hospitals’ 

uncompensated care costs and DSH 

payments based on that State’s SPRY, 

provide for a consistent way to gauge 

how hospitals that receive DSH 

payments benefit from the DSH 

program. 

Further, we believe interpreting this 

provision to be applicable on a FFY 

basis would impose an excessive burden 

on States and hospitals, in particular 

with the application of the exception for 

97th percentile hospitals. We note that 

the majority of States have SPRYs that 

do not align with the FFY. In these 

instances, if we were to apply section 

203 of the CAA 2021 to the FFY 

beginning on October 1, 2021, and 

thereafter, States would need to prorate 

the uncompensated care costs for 

affected hospitals within a SPRY 

accordingly, since the methodology for 

calculating the Medicaid shortfall 

portion of the hospital-specific DSH 

limit may not be consistent for the 

entire SPRY. If the hospital qualified as 

a 97th percentile hospital for only a 

portion of the SPRY, this proration 

would be on top of the proration that 

would already be necessary to account 

for differences between a hospital’s cost 

reporting period and the State’s SPRY. 

Finally, we believe the commenter 

who requested that we be cognizant of 

the difference in State-to-State 

distribution of DSH funds was pointing 

out that each State operates its DSH 

program differently, and that there is 

variation in how States distribute their 

DSH payments to eligible providers 

within their State DSH allotments. We 

acknowledge that States have flexibility 

in the operation of their DSH programs, 

subject to Federal requirements, 

including section 1923(g) of the Act on 

the hospital-specific DSH limit. This 

final rule does not affect the existing 

flexibility each State has in how it 

operates its DSH program or distributes 

its DSH payment in accordance with its 

State plan, but this rule does address the 

changes to the hospital-specific DSH 

limit as required by section 203 of the 

CAA. We also acknowledge that while 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13931 

25https://www.medicaid.gov/sites/default/files/ 

2020-01/part-2-additional-info-on-dsh-reportingand-auditing.pdf. 

26 Id. 

27https://www.medicaid.gov/sites/default/files/ 

2020-08/cib081820.pdf. 

the statutory changes to the hospitalspecific DSH limit are applicable to all 

States, the actual impact on hospitals 

can vary by States based on how DSH 

payments are distributed by each State. 

In developing this rule, we considered 

that each State operates its own DSH 

program. For example, we considered 

proposing to determine the 97th 

percentile hospital exception 

qualification on a State-specific level, 

rather than on a national level; however, 

as we explained in the proposed rule, 

we do not believe this would be 

consistent with the statutory language 

referring to ‘‘97th percentile of all 

hospitals.’’ Applying section 1923(g) of 

the Act, as amended, on a SPRY basis 

is aligned with how States operate their 

DSH programs and distribute their DSH 

funds, which are on a State-elected 

SPRY basis. As such, we are finalizing 

this requirement to apply the October 1, 

2021, effective date to the applicable 

SPRY beginning on or after October 1, 

2021, as proposed. 

Comment: One commenter indicated 

that CMS should provide guidance on a 

SPRY audit year that includes the 

October 1, 2021, effective date, and 

direction on how hospital-specific DSH 

limits and associated overpayments 

should be calculated. 

Response: As indicated previously in 

this final rule, we are finalizing this rule 

to apply the October 1, 2021, effective 

date to the applicable SPRY beginning 

on or after the October 1, 2021, effective 

date. To calculate hospital-specific DSH 

limits, hospitals routinely utilize two 

separate cost reports to cover the entire 

period associated with the applicable 

SPRY, in cases where the hospital’s cost 

reporting period does not correspond 

exactly to the SPRY. We have released 

guidance to answer specific questions 

related to addressing these misaligned 

periods.25

In the Additional Information on DSH 

Reporting and Auditing Requirement 

Part 2—Question 21, we discussed cost 

report proration in calculating a 

hospital’s uncompensated care costs 

(UCC) for a SPRY using more than one 

cost report, when a hospital’s cost 

reporting period does not align with the 

State’s SPRY.26 Similar proration was 

discussed when applying the ‘‘DSH 

Payments—Treatment of Third-Party 

Payers in Calculating Uncompensated 

Care Costs’’ final rule (82 FR 16114) in 

the August 18, 2020, CMCS 

Informational Bulletin entitled 

‘‘Treatment of Third Party Payers (TPP) 

in Calculating Uncompensated Care 

Costs (UCC).’’ 27

We expect that activities required for 

the implementation of the amendments 

made by section 203 of the CAA 2021 

to follow the same proration approach 

to conform hospitals’ cost reporting 

periods to the SPRY. For example, if a 

SPRY is from July 1, 2022 to June 30, 

2023, and a hospital’s cost report year 

end is December 31, regardless of the 

amendments made by section 203 of the 

CAA 2021, there is a need to prorate the 

hospital’s cost report data from both its 

December 31, 2022 and December 31, 

2023 cost reports to determine the 

hospital’s hospital-specific DSH limit 

for the SPRY from July 1, 2022 to June 

30, 2023. In using the December 31, 

2022, and December 31, 2023, cost 

report data to prorate to this SPRY, 

which is the State’s first SPRY that 

begins on or after October 1, 2021, the 

hospital and the State would need to 

follow section 1923(g) of the Act, as 

amended by section 203 of the CAA 

2021, and this final rule in determining 

the hospital-specific limit. As is 

consistent with 2008 DSH audit final 

rule, an overpayment is identified when 

the DSH payment received by a hospital 

for the SPRY is in excess of its hospitalspecific limit for the same SPRY. 

Comment: Several commenters 

expressed support of our proposal to 

determine a hospital’s qualification for 

the 97th percentile exception for each 

SPRY on a prospective basis. 

Response: We appreciate the support 

and are finalizing the determination of 

a hospital’s qualification for the 97th 

percentile exception for each SPRY on 

a prospective basis. This application 

allows for States and hospitals to know 

prior to the beginning of the SPRY 

which hospitals qualify for the 

exception. This allows States and 

hospitals to gauge how payments should 

be made and measured against hospitalspecific DSH limits and provides greater 

payment predictability than a 

retroactive application. 

Comment: One commenter expressed 

support for the proposal that CMS 

would produce two lists for qualifying 

hospitals to meet the exception for 97th 

percentile hospitals, based on either the 

percentage or total number of inpatient 

days for patients who were entitled to 

both Medicare Part A benefits and SSI 

benefits. One commenter commended 

CMS for determining the number of 

Medicare Part A SSI days for the most 

recent cost reporting period based on 

the days associated with discharges 

occurring during the cost reporting 

period. 

Response: We appreciate the support. 

We have followed the statutory language 

at section 1923(g)(2)(B)(i) and (ii) of the 

Act that specifies that hospitals may 

qualify on the basis of total number of 

inpatient days for patients who were 

entitled to both Medicare Part A benefits 

and SSI benefits or the percentage of 

such days. Further, we appreciate the 

support for our proposal to determine 

the number of Medicare Part A SSI days 

for the most recent cost reporting period 

based on the days associated with 

discharges occurring during the cost 

reporting period and are finalizing the 

methodology as proposed. 

Comment: Several commenters urged 

CMS to release the 97th percentile 

exception lists, including those 

applicable to SPRY 2022, as soon as 

possible. Several hospital associations 

and hospitals expressed that delays in 

the release may impact their ability to 

plan for future DSH payments with 

respect to anticipated decreased 

hospital-specific DSH limits. Two 

commenters recommended that CMS 

release the 97th percentile exception 

lists at least 60 days prior to the October 

1 date to which the exception lists will 

apply. Another commenter indicated 

that releasing the list at least 60 days 

prior to the October 1 date would allow 

the State and hospitals sufficient time to 

work within the time frames established 

in the State laws that govern how 

interim DSH payments are calculated 

and made to providers to make any 

necessary adjustments to DSH payments 

based on the 97th percentile exception 

lists. 

Response: We understand the 

commenters’ concerns. Unfortunately, 

we cannot commit to publishing the 

97th percentile exception lists at least 

60 days prior to the October 1 date to 

which the exception lists will apply. 

Given the dates that the necessary data 

become available, and the time needed 

for CMS to produce and publish the 

97th percentile hospital exception 

qualification lists, we cannot be certain 

of our ability to meet this deadline. 

However, we are committed to releasing 

the exception lists as soon as possible, 

after March 31 of each year, in advance 

of the October 1 date. Due to the timing 

of this final rule, we will be releasing 

the exception lists retroactively for the 

first three years (that is, for SPRYs 

beginning on or after October 1, 2021, to 

September 30, 2024). For SPRYs 

beginning on or after October 1, 2024, 

we will follow the established timeline 

so that States and hospitals will have 

the exception lists prior to October 1 

each year, followed by a correction list 


ddrumheller on DSK120RN23PROD with RULES4
13932 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

if needed, as discussed earlier in this 

final rule. 

Comment: Many commenters 

requested that CMS release the rankings 

and associated data for all hospitals in 

the universe of providers used to 

determine the qualification for the 

exemption for 97th percentile hospitals, 

rather than just those hospitals that 

qualify for the exemption. Commenters 

indicated that this would provide for 

greater transparency and also be 

informative to hospitals so that they 

know where they stand in the rankings. 

One commenter inquired whether CMS 

would release the underlying data used 

in compiling the 97th percentile 

hospital exception lists to allow for 

validation of CMS’s calculations. One 

commenter indicated that the qualifying 

lists should be readily accessible for use 

by State Medicaid agencies, hospitals, 

and other interested parties. 

Response: We intend to make 

available the data necessary for CMS to 

calculate the rankings of hospitals in the 

dataset. This data may include hospital 

names, Medicare provider numbers, cost 

report record numbers, cost reporting 

period, cost report status, SSI/Part A 

days, and total inpatient days for each 

hospital and its distinct part psychiatric 

and rehabilitation units, if applicable, in 

this universe of data. We will publish 

these data on an annual basis, 

electronically or in another format as 

determined by CMS, prior to the SPRY 

to which the associated 97th percentile 

hospital exception lists will apply. 

Comment: Several commenters 

pointed to the ‘‘all hospital’’ language in 

section 203 of the CAA 2021 and 

opposed CMS’ proposal to exclude 

hospitals that do not file Medicare cost 

reports from the dataset used to 

determine which hospitals meet the 

exception for 97th percentile hospitals. 

Commenters indicated that this 

omission would result in fewer 

hospitals qualifying to meet the 97th 

percentile exception by merit of 

shrinking the pool of hospitals in the 

dataset. Commenters requested that 

CMS include these hospitals in the 

datasets using zero values in the 

calculations. Commenters indicated that 

requiring the submission of the 

Medicare cost report to determine 

qualification to meet the exception for 

97th percentile hospitals would be 

burdensome, urging CMS to consider 

less administratively burdensome 

alternatives. 

Response: We understand and 

appreciate the commenters’ concerns. 

We have worked to identify and include 

as many hospitals as possible in the list 

of hospitals used to determine the 97th 

percentile hospital exception. While we 

understand that the statute refers to 

hospitals that are ‘‘in at least the 97th 

percentile of all hospitals’’ and that not 

all hospitals submit a Medicare cost 

report, the statute directs us to make the 

97th percentile exception qualification 

determination based on each hospital’s 

‘‘most recent cost reporting period.’’ We 

continue to believe it is reasonable to 

interpret ‘‘all hospitals’’ in this context 

to mean all hospitals with cost reports 

and to look to HCRIS, an existing CMS 

cost report data source, to identify a 

hospital’s ‘‘most recent cost reporting 

period’’ for which a hospital has a cost 

report. We are not imposing any 

additional cost reporting requirements 

on hospitals for the purpose of 

implementing the 97th percentile 

hospital exception. Furthermore, we 

believe it is reasonable and appropriate 

to use these data to build the hospital 

dataset and obtain each hospital’s total 

inpatient days, and to establish a cutoff 

for how far back we would look within 

the HCRIS database to reduce the 

inclusion of terminated, inactive 

hospitals. We again note that we 

proposed to include any hospital that 

has in HCRIS a cost report with an end 

date dating back to at least September 

30, 3 years prior to the snapshot date we 

are using to extract data. For example, 

for the 97th percentile qualification for 

SPRYs beginning during FFY 2024, the 

snapshot date is March 31, 2023, and we 

would include any hospital that has in 

HCRIS a cost report with a cost 

reporting period end date of September 

30, 2020, or later. 

We selected the 3-year cutoff based on 

timing of cost report submissions but 

also considering cost report filing delays 

and HCRIS processing lags. As long as 

a hospital has a cost report in the HCRIS 

database that meets the criteria on 

March 31, the snapshot date we are 

establishing to allow us to timely 

generate the 97th percentile hospital 

exception lists each year, the hospital 

will be included in the dataset. We are 

also including Medicare cost reports 

that are filed as low- or no-Medicare 

utilization cost reports as long as they 

exist in the HCRIS database and meet 

the specified timing criteria. Where 

there is no total inpatient day 

information or the total patient day is 

reported as zero in a cost report 

included in our dataset, we will use a 

zero value for the percentage of total 

inpatient days that are Medicare Part A 

SSI days for the purpose of the 97th 

percentile hospital ranking. 

As discussed in the proposed rule, 

even if we were to consider an 

alternative mechanism outside of the 

existing Medicare cost report data to 

collect total inpatient days from 

hospitals without Medicare cost reports 

in HCRIS, there would not be a way to 

define the most recent cost reporting 

period for those hospitals that would be 

consistent with how we are defining it 

for hospitals that do have a cost report. 

As such, we are finalizing the rule as 

proposed to exclude hospitals with no 

Medicare cost report from the dataset 

we will use to determine the lists of 

hospitals qualifying for the exception 

for 97th percentile hospitals. 

Comment: One commenter expressed 

support for the March 31 HCRIS 

snapshot date. The commenter 

indicated this will provide CMS proper 

time to ensure validity and uniformity 

of the database. 

Response: We agree; we thank the 

commenter for their support and are 

finalizing as proposed. 

Comment: A commenter indicated 

that under certain circumstances, there 

could be multiple hospitals that file 

under a single Medicare cost report and 

provider number. The commenter 

questioned if a Medicare hospital 

provider number qualified to meet the 

97th percentile exception, would all 

hospitals associated with that provider 

number qualify to meet the 97th 

percentile exception. 

Response: Yes, this would qualify all 

hospitals under this CMS Certification 

Number (CCN) to meet the exception for 

97th percentile hospitals. Our 97th 

percentile hospital exception 

determination uses each Medicareparticipating hospital’s cost report and 

the inpatient days for the relevant cost 

reporting period, all associated with the 

hospital’s CCN as stated on the cost 

report and inclusive of the CCN of any 

psychiatric and/or rehabilitation 

distinct parts that provide hospital 

services. Therefore, the 97th percentile 

hospital exception qualification would 

apply to the Medicare-participating 

hospital as a whole. If there are 

circumstances where a State Medicaid 

agency recognizes a Medicareparticipating hospital, identified on our 

97th percentile hospital list as a single 

hospital, as multiple hospitals, then the 

97th percentile exception hospital 

qualification of the single Medicareparticipating hospital would apply to 

those multiple hospitals recognized 

under Medicaid. 

Comment: One commenter indicated 

support for broadening the 97th 

percentile exception to a universe that 

includes all hospitals, despite initially 

believing that the exception applied 

only to inpatient prospective payment 

system (IPPS) hospitals. 

Response: We appreciate the support. 

We recognize that not only IPPS 

hospitals receive Medicaid DSH 


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payments, but critical access, 

rehabilitation, and psychiatric hospitals 

also may qualify to receive DSH 

payments. Further, section 1923(g)(2)(B) 

of the Act, as amended by section 203 

of the CAA 2021 statute specifies that a 

hospital must be in ‘‘at least the 97th 

percentile of all hospitals’’ to qualify to 

meet the exception. As such, we will 

produce the qualification lists inclusive 

of all hospital types and all hospitals 

with a Medicare cost report in HCRIS 

that satisfies the timing criteria 

discussed earlier in this final rule. 

Comment: One commenter was 

supportive of CMS’ proposal to allow 

hospitals to identify data issues 

resulting from mathematical or other 

similar technical errors. However, the 

commenter noted that the 1-year period 

may not be sufficient, particularly given 

the retroactive application of the initial 

datasets. Further, the commenter 

insisted that the identification of issues 

should not be limited to mathematical 

or other similar technical errors. 

Response: We appreciate the support 

but disagree with the need to extend the 

1-year period to identify issues resulting 

from mathematical or other similar 

technical errors. In addition, we 

disagree that the scope should be 

broader than issues resulting from 

mathematical or other similar technical 

errors. Any dispute over the underlying 

Medicare cost report and claims data is 

outside of this process. We will not 

attempt to resolve disputes on Medicare 

cost report and claims data, nor amend 

the underlying cost report and claims 

data as they existed in the database, as 

of the snapshot date. 

The process and procedures that we 

are establishing for the 97th percentile 

hospital exception relies on existing 

Medicare data in the CMS cost report 

and claims systems as of a particular 

snapshot date each year. We will ensure 

that we are extracting the correct values 

from those systems and compiling them 

accurately in accordance with the 

procedures we are establishing in this 

final rule and proposed to allow for an 

opportunity to make corrections where 

mathematical or other similar technical 

errors may occur in these steps. As 

such, we proposed to give States and 

interested parties 1 year from the release 

of the 97th percentile hospital lists and 

dataset, including those for retroactive 

periods back to the first SPRYs 

beginning on or after October 1, 2021, to 

bring forward issues resulting from 

mathematical or other similar technical 

errors made by CMS in the steps of 

extracting and compiling the data and 

determining the 97th percentile hospital 

exception qualification. We believe that 

not only is this timeframe appropriate 

for addressing the narrow scope of 

errors we would expect could arise in 

this process but also extending the 

timeframe out further would extend the 

period of uncertainty for States and 

hospitals relying on timely, finalized 

data. 

Comment: One commenter requested 

that in instances where CMS issues a 

revised qualifying list, any hospital that 

qualified to meet the exception for 97th 

percentile hospitals on the initial list 

should retain that status regardless of its 

ranking on the revised list. The 

commenter indicated that this policy 

would mitigate any financial disruption 

to hospitals. 

Response: We understand the 

commenter’s concern. However, in the 

unlikely case that an initially qualified 

hospital would fall below the 97th 

percentile threshold upon issuance of a 

corrected list of qualifying hospitals, 

that hospital would not qualify to meet 

the exception for 97th percentile 

hospitals. The statutory language at 

section 1923(g)(2)(B) of the Act is clear 

that to qualify to meet the exception, the 

hospital must be in at least the 97th 

percentile of all hospitals for the most 

recent cost reporting period with respect 

to the total number of inpatient days for 

the period that were made up of patients 

entitled to Medicare Part A and SSI 

benefits, or the percentage of total 

inpatient days made up of such days. As 

such, we have no authority to allow an 

unqualified hospital to receive the 97th 

percentile hospital exception due to a 

mathematical or other similar technical 

error that resulted in its erroneous 

inclusion on an initial list of qualifying 

hospitals. We are finalizing all aspects 

of the error correction process as 

proposed. 

D. Limitations on Aggregate Payments 

for DSHs Beginning October 1, 1992 

(§ 447.297) 

We proposed to eliminate the 

§ 447.297(c) requirement to publish 

annual DSH allotments in the Federal 

Register and to provide that the 

Secretary would post preliminary and 

final national expenditure targets and 

State DSH allotments in the Medicaid 

Budget and Expenditure System/State 

Children’s Health Insurance Program 

Budget and Expenditure System (MBES/ 

CBES) and at Medicaid.gov (or similar 

successor system or website). Current 

regulations require us to publish the 

annual DSH allotments in the Federal 

Register. We have found this process to 

be time consuming and administratively 

burdensome for us and are concerned 

that it makes providing the information 

to States and other interested parties 

less timely and accessible. Additionally, 

because we currently notify States 

directly regarding annual allotment 

amounts and make such information 

publicly available outside of the Federal 

Register on a routine basis, we find that 

it is duplicative and unnecessary to go 

through the process of publishing in the 

Federal Register. Therefore, by 

eliminating the § 447.297(c) requirement 

to publish annual DSH allotments in the 

Federal Register, we explained that we 

would be removing the administratively 

burdensome task, which would allow us 

to focus our efforts on providing the 

information in a timely and easily 

accessible manner through the MBES/ 

CBES and at Medicaid.gov (or similar 

successor system or website). 

Additionally, we proposed in 

§ 447.297(b) and (d)(1) to remove the 

date on which final national targets and 

allotments are published, currently 

specified as April 1, and revise this 

timeframe to as soon as practicable. In 

§ 447.297(d)(1), we also proposed to 

remove the phrase ‘‘prior to the April 1 

publication date,’’ and to add in its 

place the phrase, ‘‘prior to the posting 

date’’ for consistency with the new 

timeframe. We proposed to remove the 

April 1 publication date to allow for 

Medicaid expenditures associated with 

the FFY DSH allotment to be finalized. 

CMS utilizes these amounts in the 

calculations of the 12 percent limit 

under section 1923(f)(3)(B)(ii) of the 

Act. Finally, we proposed to remove 

§ 447.297(c), which consists of 

redundant publication requirements 

already identified in § 447.297(b), (c), 

and (d), in its entirety, to align with our 

proposed changes § 447.297(c). 

We received public comments on 

these proposals. The following is a 

summary of the public comments we 

received and our responses. 

Comment: Several commenters 

commented on this proposal, and with 

one exception, commenters were not 

supportive of this proposal. The 

commenters cited concerns about 

transparency, as the MBES/CBES 

systems where we would publish 

amounts are not accessible to the 

general public. They also cited concerns 

about accountability, as Medicaid.gov is 

less formal than a Federal Register 

publication, and the latter ensures a 

static record for historicity. 

Response: While we appreciate the 

concerns of commenters, we are 

finalizing as proposed. We will ensure 

ongoing transparency by publishing 

final amounts on a publicly accessible 

page on Medicaid.gov instead of simply 

distributing to States through MBES/ 

CBES. This step ensures that hospitals, 

researchers, oversight entities, and 

others will have timely access to the 


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data as well. We also believe posting to 

Medicaid.gov can provide sufficient 

accountability regarding the accuracy of 

the final amounts. We already publish 

many important documents and 

guidance on our website, and we will 

ensure the postings are clear with 

respect to the date they are published, 

and with versions for any necessary 

changes. 

Comment: A couple commenters 

specifically opposed the removal of the 

‘‘April 1’’ date from the regulatory 

language and did not want the final 

allotments published any later than that 

date. 

Response: We are also finalizing as 

proposed the regulatory language 

removing the ‘‘April 1’’ date 

specification and replacing it with ‘‘as 

soon as practical.’’ Our reasoning is 

twofold. First, we already currently 

send States information prior to when 

the Federal Register publication occurs. 

This change will not alter our existing 

practice of providing information to 

States as soon as we have it available. 

Second, this change is important to 

allow us flexibility when some States 

are late reporting their expenditure data, 

causing a delay in calculating final 

allotments. By removing the April 1 

language, we can ensure that the 

publicly available final report is more 

accurate. 

We acknowledge this change in 

publication location and uncertainty of 

dates could make it difficult for nonState entities to know when the final 

allocation report is available. We intend 

to communicate through multiple 

channels, such as emails, list servs, and 

calls with interested parties, when the 

Medicaid.gov publication will be 

available, and once it is posted. 

E. Reporting Requirements (§ 447.299) 

1. Calculating Medicaid Shortfall 

We proposed to revise § 447.299(c)(6), 

(7), (10), and (16) to reflect the statutory 

changes made by section 203 of the 

CAA 2021 to update the methodology 

for calculating the Medicaid shortfall 

portion (Medicaid costs less Medicaid 

payments) of the hospital-specific DSH 

limit to only include costs and 

payments for hospital services furnished 

to beneficiaries for whom Medicaid is 

the primary payer, effective for the 

SPRY beginning on or after October 1, 

2021, and subsequent years, and to 

include the statutory exception for 97th 

percentile hospitals. Hospitals meeting 

this exception will calculate their 

hospital-specific DSH limit using the 

higher value of either the hospitalspecific DSH limit calculated per the 

methodology which includes only costs 

and payments associated with 

beneficiaries for whom Medicaid is the 

primary payer or the hospital-specific 

DSH limit calculated per the 

methodology in effect on January 1, 

2020. We reviewed the other data 

elements in § 447.299(c) to determine if 

additional updates were necessary to 

account for the changes made by section 

203 of the CAA 2021. However, we 

noted our belief that these are the only 

data elements requiring updates because 

these are the only elements that will 

differ based on whether statutory 

requirements provide for the 

consideration of all Medicaid eligible 

individuals or only those for whom 

Medicaid is the primary payer. 

Therefore, we explained that it was only 

necessary to revise § 447.299(c)(6), (7), 

(10), and (16) to account for the 

statutory changes made by section 203 

of the CAA 2021. 

Accordingly, we proposed to revise 

§ 447.299(c)(6), which specifies that this 

data element should include inpatient 

and outpatient Medicaid fee-for-service 

(FFS) basic rate payments paid to 

hospitals, ‘‘not including DSH payments 

or supplemental/enhanced Medicaid 

payments, for inpatient and outpatient 

services furnished to Medicaid eligible 

individuals.’’ We proposed this change 

because, for most hospitals, for SPRYs 

beginning on or after October 1, 2021, 

only those FFS payments for Medicaid 

eligible individuals for whom Medicaid 

is the primary payer will be counted in 

the calculation of the hospital-specific 

DSH limit. Therefore, we proposed to 

revise § 447.299(c)(6) to remove the 

reference to Medicaid eligible 

individuals and update the regulatory 

text to indicate that FFS payments for 

inpatient and outpatient hospital 

services furnished to Medicaid 

individuals in accordance with 

§ 447.295(d) should be included in this 

data element. 

We also proposed to revise 

§ 447.299(c)(7), which specifies that this 

data element includes payments made 

to the hospitals ‘‘by Medicaid managed 

care organizations for inpatient hospital 

and outpatient hospital services 

furnished to Medicaid eligible 

individuals.’’ We proposed this change 

because for most hospitals, for SPRYs 

beginning on or after October 1, 2021, 

only payments made by Medicaid 

managed care organizations for 

Medicaid eligible individuals for whom 

Medicaid is the primary payer will be 

counted in the calculation of the 

hospital-specific DSH limit. Therefore, 

we proposed to revise § 447.299(c)(7) to 

remove the reference to Medicaid 

eligible individuals and update the 

regulatory text to indicate that Medicaid 

managed care payments for inpatient 

and outpatient hospital services 

furnished to Medicaid individuals in 

accordance with § 447.295(d) should be 

included in this data element. 

We also proposed to revise 

§ 447.299(c)(10), which specifies that 

this data element includes ‘‘costs 

incurred by each hospital for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid eligible 

individuals.’’ We proposed this change 

because for most hospitals, for SPRYs 

beginning on or after October 1, 2021, 

only costs incurred on behalf of 

Medicaid eligible individuals for whom 

Medicaid is the primary payer will be 

counted in the calculation of the 

hospital-specific DSH limit. Therefore, 

we proposed to revise § 447.299(c)(10) 

to remove the reference to Medicaid 

eligible individuals and update the 

regulatory text to indicate that costs 

incurred by each hospital for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid 

individuals as determined in 

accordance with § 447.295(d) should be 

included in this data element. 

Finally, we proposed to revise 

§ 447.299(c)(16), which currently 

specifies the calculation of 

uncompensated care costs to include 

‘‘the total cost of care for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid eligible 

individuals’’ and the uninsured, which 

are to be offset by ‘‘Medicaid FFS rate 

payments, Medicaid managed care 

organization payments, supplemental/ 

enhanced Medicaid payments, 

uninsured revenues, and section 1011 

payments for inpatient and outpatient 

hospital services.’’ Therefore, we 

proposed to revise § 447.299(c)(16) to 

remove the reference to ‘‘Medicaid 

eligible individuals’’ and update the 

regulatory text to indicate that total 

annual uncompensated care cost equals 

the total cost of care for furnishing 

inpatient hospital and outpatient 

hospital services to ‘‘Medicaid 

individuals as determined in 

accordance with § 447.295(d) and to 

individuals with no source of thirdparty coverage for the hospital services 

they receive,’’ less the sum of payments 

received on their behalf, should be 

included in this data element. 

We proposed that this and other CAA 

2021-related proposals, noted in the 

respective sections, be applicable to 

fiscal years beginning on or after 

October 1, 2021, to align with the 

effective date of the amendments made 

by section 203 of the CAA 2021. 

We received public comments on 

these proposals. The following is a 


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summary of the public comments we 

received and our responses. 

Comment: A few commenters 

indicated that the DSH audit should 

indicate which hospitals met the 

exception for 97th percentile hospitals 

and which methodology had a higher 

hospital-specific DSH limit: the limit 

including only costs and payments for 

Medicaid patients for whom Medicaid is 

the primary payer in the Medicaid 

portion of the hospital-specific limit 

calculation, or the methodology in effect 

on January 1, 2020. Commenters 

indicated that this information would be 

beneficial for informing future policy 

decisions. 

Response: We agree that this would be 

useful information and suggest that 

auditors provide this information in the 

independent certified audit. Because we 

did not propose to include this element 

as a required part of the independent 

certified audit, future rulemaking would 

be necessary to impose this as a 

requirement. We are finalizing the 

provisions as proposed. 

2. Reporting DSH Overpayments 

To improve the accuracy of 

identification of provider overpayments 

discovered through the DSH audit 

process, we proposed to add an 

additional reporting requirement for 

annual DSH audit reporting required by 

§ 447.299. We proposed to redesignate 

§ 447.299(c)(21) as paragraph (c)(22) of 

that section, and to add a proposed new 

§ 447.299(c)(21) to require an additional 

data element for the required annual 

DSH audit reporting. The new data 

element we proposed would require 

auditors to quantify the financial impact 

of any finding, including any impact 

resulting from incomplete or missing 

data, lack of documentation, noncompliance with Federal statutes or 

regulations, or other deficiencies 

identified in the independent certified 

audit, which may affect whether each 

hospital has received DSH payments for 

which it is eligible within its hospitalspecific DSH limit. 

Currently, audits may include a 

caveat indicating the auditors are unable 

to quantify the financial impact of an 

identified audit finding. We proposed 

that, for purposes of § 447.299, audit 

finding means an issue identified in the 

independent certified audit required 

under § 455.304 concerning the 

methodology for computing the 

hospital-specific DSH limit or the DSH 

payments made to the hospital, 

including compliance with the hospitalspecific DSH limit as defined in 

§ 447.299(c)(16). For example, an audit 

may identify that a hospital was unable 

to satisfactorily document the outpatient 

services it provided to Medicaid eligible 

patients, resulting in the exclusion of 

associated costs and payments from the 

Medicaid shortfall calculation. Based on 

this lack of documentation, the audit 

may include a caveat noting the 

auditor’s finding that the hospital’s total 

uncompensated care cost may be 

misstated as a result of this exclusion, 

with unknown impact on the hospitalspecific DSH limit. Given this lack of 

quantification of the financial impact of 

this finding, CMS and the State would 

be unable to determine whether an 

overpayment has resulted related to this 

audit finding, and if so, the amount. We 

believe that requiring the quantification 

of such findings would limit the burden 

on States and CMS of performing 

follow-up reviews or audits. 

Specifically, conducting a secondary 

review or audit after the independent 

auditors have completed theirs would 

lengthen the review process, and 

therefore, delay the results of the audit. 

It would also require additional time, 

personnel, and resources by CMS, 

States, and hospitals to participate in a 

secondary review or audit, which would 

largely duplicate aspects of the audit 

already conducted by the independent 

auditor. If finalized, the new data 

element would help ensure appropriate 

recovery and redistribution, as 

applicable, of all DSH overpayments in 

excess of the hospital-specific limit. 

Adding this requirement to the 

submission would also ensure auditors 

provide the additional information at 

the time they are already reviewing the 

applicable data, reducing the labor 

burden as opposed to a later, secondary 

audit. 

We explained that auditors would be 

afforded the professional discretion and 

the flexibility to determine how to best 

quantify these amounts in the audit 

findings. For example, auditors would 

be able to use alternative source 

documentation, utilize a methodology to 

estimate the financial impact in terms of 

the dollar amount at risk, or provide an 

estimated range of financial impact if a 

determination of an exact dollar amount 

is not possible. However, we also noted 

our understanding that, due to the 

complexity of issues that may arise, the 

actual financial impact of an audit 

finding may not always be calculable. 

Therefore, we proposed that, in the 

expectedly rare event that the actual 

financial impact cannot be calculated, a 

statement of the estimated financial 

impact for each audit finding identified 

in the independent certified audit that 

is not reflected in the other data 

elements identified in § 447.299(c) 

would be required. We proposed that 

actual financial impact would mean the 

total amount associated with audit 

findings calculated using the 

documentation sources identified in 

§ 455.304(c). Estimated financial impact 

would mean the total amount associated 

with audit findings calculated on the 

basis of the most reliable available 

information to quantify the amount of 

an audit finding in circumstances where 

complete and accurate information 

necessary to determine the actual 

financial impact is not available from 

the documentation sources identified in 

§ 455.304(c). The estimated financial 

impact would use the most reliable 

available information (for example, 

related source documentation such as 

data from State systems, hospitals’ 

audited financial statements, and 

Medicare cost reports) to quantify an 

audit finding as accurately as possible. 

We noted our belief that this additional 

data reporting element is necessary to 

better enable our oversight of the 

Medicaid DSH program to better ensure 

compliance with the hospital-specific 

DSH limit in section 1923(g) of the Act. 

Additionally, we proposed to add 

§ 447.299(f), which would codify our 

existing policy for how overpayments 

identified through the annual 

independent certified DSH audits 

required under part 455, subpart D, 

must be handled and reported to CMS. 

Specifically, we proposed that DSH 

payments found in the independent 

certified audit process under part 455, 

subpart D, to exceed hospital-specific 

limits are provider overpayments for 

which FFP must be returned to the 

Federal Government in accordance with 

the requirements in 42 CFR part 433, 

subpart F, or redistributed by the State 

to other qualifying hospitals, if 

redistribution is provided for under the 

approved State plan. We proposed that 

overpayment amounts returned to the 

Federal Government must be separately 

reported on the Form CMS–64 as a 

decreasing adjustment which 

corresponds to the fiscal year DSH 

allotment and Medicaid SPRY of the 

original DSH expenditure claimed by 

the State. 

We further proposed to add 

§ 447.299(g), which would establish 

reporting requirements concerning the 

redistribution of DSH overpayments in 

accordance with a State’s redistribution 

methodology in its Medicaid State plan, 

as applicable. Specifically, we proposed 

that, as applicable, States would be 

required to report any overpayment 

redistribution amounts on the Form 

CMS–64 within 2 years from the date of 

discovery that a hospital-specific limit 

has been exceeded, as determined under 

§ 433.316(f) in accordance with a 


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28 88 FR 11865 at 11876. 

29See for example 73 FR 77904 at 77917 for types 

of source documentation, which can include 

hospital cost reports, hospital financial statements, 

and other hospital accounting records. 

redistribution methodology in the 

approved Medicaid State plan. The 

State would be required to report 

redistribution of DSH overpayments on 

the Form CMS–64 as separately 

identifiable decreasing adjustments 

reflecting the return of the overpayment 

as specified in § 447.299(f) and 

increasing adjustments representing the 

redistribution by the State. Both 

adjustments must correspond to the 

fiscal year DSH allotment and Medicaid 

SPRY of the related original DSH 

expenditure claimed by the State. These 

proposed additions of paragraphs (f) and 

(g) to § 447.299 would memorialize our 

current policy concerning the return of 

FFP in or redistribution of Medicaid 

DSH payments in excess of the hospitalspecific limit in regulation, and thereby 

promote clarity and transparency, avoid 

misunderstanding, and enhance 

oversight of the Medicaid DSH program. 

We explained that these proposals for 

the independent certified audit and 

DSH-related claims reporting would 

enhance Federal oversight of the 

Medicaid DSH program and improve the 

accuracy of DSH audit overpayments 

identified and collected through annual 

DSH audits. We invited comments on 

these proposals. The following is a 

summary of the public comments we 

received and our responses. 

Comment: A few commenters 

expressed concerns about the language 

regarding auditors’ ability to provide an 

estimate of the financial impact. One 

commenter opposed the provision on 

the basis that overpayment 

determinations would be based on 

estimates. Another commenter sought 

clarity on how an auditor would be able 

to submit an estimated range of impact. 

Response: We want to clarify our 

language around the use of estimates 

and financial impact ranges, and our 

expectation for how States should 

handle estimated financial impacts. 

First and foremost, we emphasize that 

we expect auditors to calculate an actual 

financial impact of their audit findings 

wherever possible. Experience has 

shown that currently, some States’ 

contracts with auditors do not require 

any quantification of overpayments, 

leaving this critical activity incomplete 

following completion of the audit. By 

finalizing this new data element 

proposal, we intend to require that State 

contracts with auditors must require the 

auditor to take the extra step of 

quantifying the financial impact of their 

findings, based on the audit work 

already being performed. We intend to 

stop the practice of a State’s acceptance 

of auditor ‘‘caveats’’ unaccompanied by 

a statement of actual or estimated 

financial impact, which leaves 

unnecessary duplicative and 

burdensome work to the State and CMS 

to determine any associated 

overpayment amount. We believe the 

additional cost and burden associated 

with the new data element would be 

minimal given that auditors are already 

engaged in a focused review of available 

documentation to quantify the aggregate 

amounts that comprise each of the 

existing data elements required under 

§ 447.299(c). 

However, as stated in the proposed 

rule, we acknowledge that even where 

State contracts with auditors require the 

auditor to quantify the actual or 

estimated financial impact of any 

findings, there are rare circumstances 

where the financial impact of an 

identified issue cannot be quantified. As 

commenters noted, we would allow the 

auditor to submit an estimated impact 

in these expectedly rare circumstances. 

We want to clarify that the reference to 

an ‘‘estimated range of financial 

impact’’ 28 in the proposed rule was 

intended to refer to this circumstance. 

We also want to clarify that we do not 

require that States treat an estimate an 

auditor produces in this context as a 

determination of an overpayment 

amount. Consistent with our 

characterization of overpayments in 

§ 433.316(c)(1) through (3), an estimate 

would reflect an inability to calculate a 

specific amount and would not 

represent a quantified overpayment. It is 

our expectation that more auditors, by 

employing appropriate methods at their 

professional discretion, have the ability 

to quantify these amounts, than are 

currently being required to do so under 

their contracts with the relevant State. If 

an auditor is truly unable to quantify a 

finding or caveat using its best 

professional efforts, the auditor should 

recommend specific corrective action in 

its audit report. We expect that the 

States will submit a corrective action 

plan as part of the final audit report for 

CMS approval. Additionally, we remind 

States that under 42 CFR 431.992, a 

corrective action plan may be required 

for possible payment error in 

association with the Payment Error Rate 

Measurement process described at 42 

CFR 431.950 et seq. We realize that 

given the independent certified DSH 

audit and report is not due to us until 

the end of the calendar year 3 years 

following the end of each SPRY, there 

may be a significant lag between when 

an auditor identifies an issue and when 

the State and hospitals are able to 

implement corrective action. We intend 

to take this lag into consideration in 

determining whether the State’s annual 

audit and DSH payments meet Federal 

requirements. We may use the deferral 

and/or disallowance of FFP per 

§ 447.299(e) to ensure timely 

compliance with Federal DSH reporting 

requirements. 

Comment: One commenter requested 

that CMS provide standardized 

guidance for how to calculate and 

quantify any errors and overpayment 

amounts. They were concerned that 

variations in methodology would result 

in disparate and possibly inequitable 

impacts from the new data element. 

Response: We understand the desire 

for standardized guidance, and we did 

consider this option. However, we are 

finalizing as proposed and will continue 

to evaluate the need for additional CMS 

guidance. We expect auditors to utilize 

their professional discretion to 

determine how to best quantify errors 

and overpayment amounts. Allowing 

this flexibility acknowledges the 

potential variability in issues an auditor 

may identify. In addition, auditors are 

not wholly without guidance on this 

issue. Auditors should utilize the source 

documents discussed throughout the 

2008 DSH audit final rule to develop 

their calculations.29 Finally, as always, 

we are available to assist any States 

seeking to develop or enhance their 

instructions to auditors. 

Comment: A few commenters 

expressed concerns on burden and 

auditors’ ability to quantify data caveats. 

Specifically, one commenter opposed 

the proposed new data element because 

the requirement to quantify data caveats 

would present a significant burden on 

States to pay for that level of audit. They 

recommended that instead CMS should 

target States with the highest DSH 

allotments for this new requirement or 

that CMS should hire a vendor to 

perform all audits. Another commenter 

stated that CMS lacked data supporting 

the assertion that auditors could easily 

quantify their findings, or that it would 

be rare for an auditor to need to provide 

an estimate. 

Response: We disagree that this new 

requirement will constitute a significant 

burden increase. If an auditor is already 

completing a full review of DSH 

documentation, then the information 

needed to calculate amounts should be 

readily available and the calculation of 

associated amounts would not create a 

significantly burdensome additional 

step. In other words, if an auditor is 

performing a review of all available 

documentation in order to produce the 


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30https://www.medicaid.gov/medicaid/ 

downloads/part-1-additional-info-on-dsh-reportingand-auditing.pdf. 

audit, then they have the documentation 

that will inform how payments were 

made and whether claims for FFP are 

supported, which should allow the 

auditor to identify and calculate any 

possible overpayments. If a State is 

finding there is a significant change in 

effort to meet this additional 

requirement, it could be an indication 

that previous audit contracts were too 

limited to result in an independent 

certified audit sufficient to identify 

whether DSH payments to hospitals 

were consistent with each provider’s 

hospital-specific DSH limit. In addition, 

because we are allowing flexibility in 

methodology, an auditor could (and 

should) utilize an approach that 

minimizes unnecessary burden while 

still arriving at a mathematically valid 

final calculation. As discussed in a 

previous response, experience has 

shown that some States have limited 

contracts with their auditors to meet 

minimum requirements, which results 

in audit reports that rely heavily on data 

caveats and are limited in their 

usefulness for identifying overpayment 

amounts. 

The DSH audits are statutorily 

required under section 1923(j) of the 

Act, which places the requirement on 

the States to perform the audit. All 

States that make DSH payments must 

comply with the independent certified 

audit requirements as a condition of 

receipt of FFP in their DSH payments. 

We do not believe the statute 

contemplates applying more stringent 

audit standards only to some States. We 

believe this new requirement is 

important to ensuring that payments are 

being made properly, regardless of the 

potential amount of overpayment that 

could have occurred in a given State. 

Additionally, section 1923(j) of the 

Act requires States, not CMS, to submit 

an independent certified audit. We 

therefore established in the 2008 DSH 

final rule the requirement for States to 

contract with an independent auditor to 

meet this requirement; CMS does not 

have authority to hire a vendor to 

perform all independent certified 

audits, and to do so would duplicate a 

requirement that Congress has placed on 

the States. We note that FFP is available 

in States’ allowable administrative 

expenditures for their audit contracts. 

Lastly, regarding the comment stating 

CMS lacked data supporting the 

assertion auditors could easily quantify 

their findings, we have heard from 

various auditors directly that they can 

provide more data but are not presently 

being requested by States to do so. This 

information about auditors’ experiences 

is why we are confident it would be 

unlikely that an auditor would need to 

provide an estimated financial impact 

amount in more than rare 

circumstances. Therefore, we are 

finalizing this required data element 

with the expectation that States will 

contract with auditors to take the 

appropriate steps to quantify findings 

for which some States’ auditors have 

been including data caveats. 

Comment: A few commenters 

expressed concern in regard to the 

implementation of the new data element 

and its interplay with the other data 

elements. One commenter requested 

that CMS clarify how the new data 

element would be used. They 

specifically inquired if CMS would 

calculate a new total annual UCC since 

the commenter perceived that the new 

data element quantifying any 

overpayments would not necessarily be 

reproducible from the other data 

elements already included in the audit. 

On the other hand, another commenter 

questioned whether an amount 

quantified under this new requirement 

would not be already accounted for in 

other data elements of the audit and 

expressed concern about duplication of 

effort. 

Response: The intent of the new data 

element, to the extent an auditor has 

provided actual calculations of impacts, 

is for States to treat it as an identified 

overpayment amount. It relates to a 

quantification of errors, and errors 

should not be represented in the other 

data elements of the report, as amounts 

inclusive of errors would presumably be 

unsupported by documentation, 

inaccurate, or otherwise inappropriate. 

A State’s calculated UCC or hospitalspecific DSH limit should not include 

errant or unsupported data, and 

therefore the quantification included in 

the new data element should not impact 

the UCC/hospital-specific DSH limit or 

necessitate a change. 

If the State plan methodology allows 

for redistribution that would result in 

changes to DSH audit data elements, we 

would expect the State to reflect the 

redistribution-related changes to 

applicable data elements in relevant 

CMS–64s and in revised data element 

reports. The impacts calculated under 

the new data element should not 

duplicate any other data elements in 

content, but should be consistent with 

and may be calculated based on other 

required data elements, as determined 

by the auditor. Additionally, we are 

finalizing at § 447.299(c)(21) language 

that specifically states the amount for 

the new data element should include 

amounts ‘‘not otherwise reflected in 

data elements described in this 

paragraph (c).’’ 

Comment: A few commenters express 

concern on the parameters of the new 

data element. Specifically, one 

commenter questioned if ‘‘disclosures’’ 

should be regarded as the types of data 

caveats and errors that an auditor would 

be required to quantify under this new 

requirement. Another requested an 

exception to the requirement when a 

State is aware an addendum is 

forthcoming on an audit. 

Response: We are unsure precisely 

what the commenter meant by their use 

of ‘‘disclosure.’’ If ‘‘disclosure’’ is being 

used synonymously with data caveat 

and is included in lieu of providing a 

calculated impact where it would be 

possible to state the actual or estimated 

financial impact of an identified issue, 

then this information would be covered 

by the new requirement we are 

finalizing in this rule. If the 

‘‘disclosure’’ is merely to make CMS 

aware of a qualitative circumstance that, 

by nature, could not be associated with 

a quantified financial impact, we would 

not expect an auditor to attempt to 

produce an actual or estimated impact. 

There is no exception to this data 

requirement, or independent certified 

audit deadlines in general, when a State 

or auditor knows a change or addendum 

to the audit report is forthcoming. 

Existing regulations at § 433.320(c) 

contemplate scenarios where an 

overpayment amount is subsequently 

adjusted and provides the requirements 

and procedures for how to address those 

changes. In addition, frequently asked 

question (FAQ) #17 of the ‘‘Additional 

Information on the DSH Reporting and 

Audit Requirements’’ guidance 30

explains that States have 3 years beyond 

the applicable FFY for ongoing report 

and audit submission, in recognition of 

potential delays in obtaining needed 

information. Based on the audit and 

reporting deadlines, the requirement in 

§ 447.45(d) for provider claims to be 

filed within a year from the date of 

service and promptly paid by the State, 

and the 2-year timely claim filing 

requirement in 45 CFR 95.7, we 

explained in FAQ #17 that there should 

not be a significant adjustment to 

Medicaid payments that would warrant 

a corrected audit and report. However, 

we acknowledge there is still a 

possibility that a significant adjustment 

to Medicaid payment may occur for 

which the State claims Federal 

matching dollars (or returns Federal 

matching dollars) as a prior period 

adjustment, falling outside the timely 

claims filings we would expect to be 


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reflected in original audit submissions. 

In these instances, the State should 

submit corrected audits and data 

element reports in the same manner as 

the originals, indicating post-audit 

adjustments to Medicaid and DSH 

payments that are reflected in the audit 

or report (or uncompensated care costs 

if Medicaid payment adjustments affect 

the Medicaid shortfall) once those 

adjustments have been made. 

Comment: One commenter expressed 

concern about the disparate impact this 

requirement may have for hospitals that 

disproportionately experience certain 

data issues outside of a State’s or 

hospital’s control, such as a hospital 

with a high volume of out-of-State 

patients that cause delays in obtaining 

necessary documentation. 

Response: We want to emphasize that, 

although we hope this new requirement 

will compel action by States to contract 

for, ensure the completion of, and 

submit thorough DSH audits, there is 

still flexibility for those limited 

scenarios where an auditor simply 

cannot obtain the data or employ 

appropriate mathematical methods to 

quantify the financial impact of an 

identified issue. We proposed that 

auditors would be able to provide an 

estimated financial impact in these 

situations. We also note that under 

existing policy and as finalized in this 

section of this final rule, States have 3 

years beyond the applicable FFY to 

submit audits, and 2 years following the 

identification of an overpayment to 

perform redistributions, as applicable 

under the State plan. The regulations at 

§ 433.320, as mentioned previously, also 

contemplate subsequent adjustments to 

identified overpayment amounts. 

Comment: A few commenters 

requested changes or sought clarity 

around the scope of the overpayment 

policy in § 447.299(f). Specifically, one 

commenter requested an exception to 

the requirement to recoup or 

redistribute an identified overpayment 

as described in § 447.299(f) if the State 

knows an audit modification is 

forthcoming in the near future that 

would require a revised redistribution 

or recoupment. Another comment 

requested clarification about how States 

should handle an underpayment 

identified in the new DSH data element 

if the State had not paid out its entire 

DSH allotment initially and its 

approved DSH payment methodology 

called for additional payments to one or 

more DSH hospitals with room under 

the hospital-specific DSH limit. 

Response: We are finalizing the 

§ 447.299(f) provision as proposed and 

without an exception to this provision 

when a State knows a change to the 

independent certified audit report is 

likely to be forthcoming. As mentioned 

in a previous response, we already 

allow States 3 years beyond the 

applicable FFY for ongoing report and 

audit submission under § 455.304(b). In 

addition, if an overpayment is 

discovered later, then that overpayment 

would be subject to the same 

requirements as any other State 

Medicaid overpayment, and should be 

handled in accordance with part 433, 

subpart F. While we appreciate that 

there may be rare circumstances when 

certain information is not available in 

time to meet these deadlines, we think 

the time allowed is more than adequate 

for the vast majority of cases and do not 

believe that an extension or indefinite 

timeframe for the independent certified 

audit and report would be appropriate. 

States retain considerable flexibility 

to design a payment adjustment 

methodology for DSH hospitals. If States 

choose to pay up to a hospital’s UCC 

(the full extent of its hospital-specific 

DSH limit, subject to available funds 

within the State’s Federal Medicaid 

DSH allotment), in some instances, the 

DSH audit may identify hospitals that 

were not paid up to their 

uncompensated care cost as provided in 

the State’s approved DSH payment 

methodology. If the State plan outlines 

an interim payment methodology, the 

State may be able to make additional 

DSH payments or redistribute amounts 

from hospitals that received excess DSH 

payments (over their hospital-specific 

DSH limits) to these hospitals with 

remaining uncompensated care costs 

through a reconciliation process to 

address the ‘‘underpayment.’’ 

Comment: One commenter sought 

clarification regarding how the effective 

date of the rule would impact States 

with respect to § 447.299(g); for 

example, the commenter sought 

clarification on how this new 

requirement would impact States 

currently performing redistributions on 

amounts from more than 2 years prior. 

The commenter also inquired from what 

date related to a discovered 

overpayment a State would have 2 years 

to redistribute. 

Response: We are finalizing 

§ 447.299(g) as proposed. The 2-year 

policy for redistribution will apply for 

overpayments identified from the 

effective date of this final rule, onward. 

However, this policy has already been 

communicated directly to States, which 

have been aware of the two-year 

timeframe for performing redistributions 

provided for under the State’s approved 

DSH payment methodology; this final 

rule merely codifies this existing policy 

in regulation. If a State is currently 

processing older redistributions, then 

the State should make every effort to 

come into compliance within the 

timeframes established in this final rule 

as expeditiously as possible. Regarding 

the date of discovery of an overpayment, 

we intend the 2-year timeframe for 

redistribution to be determined 

consistent with the policy we are 

finalizing at § 433.316(f), where we 

define the date of discovery of a DSH 

audit overpayment. 

Comment: One commenter was in 

favor of the redistribution provisions in 

proposed § 447.299(f) and (g) for the 

clarity they would provide States on an 

issue that had multiple reasonable 

interpretations, but suggested CMS 

collect hospital-specific data following 

any redistributions. 

Response: We thank the commenter 

for their suggestion. When our analysts 

who perform reviews of State-submitted 

CMS–64s receive a CMS–64 that 

indicates redistributions, and a State has 

not otherwise provided updated 

hospital-specific data in a revised data 

elements report after the submission of 

the independent certified audit for the 

relevant year, we perform outreach to 

confirm the new hospital-specific 

payment amounts and hospital-specific 

DSH limits and to instruct the State to 

submit a revised data elements report 

reflecting these new amounts. 

We are finalizing the provisions to 

§ 447.299 as proposed, with minor 

phrasing changes to § 447.299(c)(6), 

(c)(10) introductory text, (c)(10)(ii), and 

(c)(16) replacing ‘‘pursuant to’’ with ‘‘in 

accordance with’’ to align with current 

style guidelines. 

F. Definitions (§ 455.301) 

We proposed to revise the definition 

of the ‘‘independent certified audit’’ to 

include the requirement for auditors to 

quantify the financial impact of each 

audit finding, or caveat, on an 

individual basis, for each hospital, per 

the reporting requirement in proposed 

§ 447.299(c)(21) and under section 

1923(j)(1)(B) of the Act. We explained 

that updating this definition is 

consistent with the goals of the updates 

to § 447.299(c)(21) to facilitate our 

determination of whether the State 

made DSH payments that exceeded any 

hospital’s specific DSH limit in the 

Medicaid SPRY under audit. 

Specifically, as discussed in item five of 

the proposed provisions, we proposed 

to add to annual DSH reporting required 

under § 447.299(c) a requirement for 

States to report the financial impact of 

audit findings identified by the State’s 

independent auditor. To align with this 

proposal, we proposed to revise the 

definition of the independent certified 


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audit under § 455.301 to include the 

auditor’s certification of ‘‘a 

quantification of the financial impact of 

each audit finding on a hospital-specific 

basis.’’ As previously discussed, based 

on current independent certified DSH 

audit submissions, we are at times 

unable to determine whether a DSH 

overpayment to a provider has occurred, 

the underlying cause of any 

overpayment, and the amount of the 

overpayment(s) associated with each 

cause. This is the result of an auditor 

including audit findings or caveats 

indicating that missing information or 

other issues may have an impact on the 

calculation of total uncompensated care 

costs (that is, the hospital-specific DSH 

limit), while not making a 

determination of the actual (or 

estimated) financial impact of the 

identified issue. As such, we noted our 

belief that revising the definition to 

include a quantification of the financial 

impact of any issues identified in the 

audit is necessary to better ensure 

proper oversight and integrity of the 

DSH program. 

We solicited comments related to the 

proposed change. We did not receive 

public comments on this provision and 

are finalizing as proposed these changes 

to § 455.301. 

G. Condition for Federal Financial 

Participation (FFP) (§ 455.304) 

We proposed to revise § 455.304(d)(1), 

(3), (4), and (6) to reflect the proposed 

revisions to the independent certified 

data elements at § 447.299(c)(6), (7), 

(10), and (16). The revisions would 

reflect the statutory changes made by 

section 203 of the CAA 2021, updating 

the independent certified audit 

verifications as they relate to the 

treatment of Medicaid eligibles and 

third-party payers. We reviewed the 

other independent certified audit 

verifications in § 455.304(d) to 

determine if additional updates were 

necessary to account for the changes 

made by section 203 of the CAA 2021. 

However, we noted our belief that these 

are the only verifications requiring 

updates because these are the 

verifications that consider the treatment 

of Medicaid eligibles for purposes of the 

independent certified audit. Therefore, 

it is only necessary to revise 

§ 455.304(d)(1), (3), (4), and (6) to 

account for the statutory changes made 

by section 203 of the CAA 2021. 

Accordingly, we proposed to revise 

§ 455.304(d)(1), which specifies that 

auditors should verify that each 

qualifying hospital that receives DSH 

payments, associated with the 

provisions of services to ‘‘Medicaid 

eligible individuals and individuals 

with no source of third-party coverage,’’ 

is allowed to retain that payment. We 

proposed this change because for most 

hospitals, for SPRYs beginning on or 

after October 1, 2021, the methodology 

by which these DSH payments are 

calculated and paid will be reflective of 

Medicaid costs and payments associated 

with Medicaid eligible individuals for 

whom Medicaid is the primary payer. 

Therefore, we proposed to revise 

§ 455.304(d)(1) to remove the reference 

to Medicaid eligible individuals and 

update the regulatory text to indicate 

that the DSH payments are associated 

with inpatient hospital and outpatient 

hospital services provided to Medicaid 

individuals as determined in 

accordance with § 447.295(d). 

We also proposed to revise 

§ 455.304(d)(3), which specifies that 

‘‘[o]nly uncompensated care costs of 

furnishing inpatient and outpatient 

hospital services to Medicaid eligible 

individuals’’ and the uninsured should 

be included in the calculation of the 

hospital-specific DSH limit. We 

proposed this change because for most 

hospitals, for SPRYs beginning on or 

after October 1, 2021, only costs 

incurred on behalf of Medicaid eligible 

individuals for whom Medicaid is the 

primary payer will be counted in the 

calculation of the hospital-specific DSH 

limit. Therefore, we proposed to revise 

§ 455.304(d)(3) to remove the reference 

to Medicaid eligible individuals and 

update the regulatory text to indicate 

that uncompensated care costs for 

furnishing inpatient hospital and 

outpatient hospital services to Medicaid 

individuals is determined in accordance 

with § 447.295(d). We also proposed to 

revise § 455.304(d)(3) to streamline this 

provision by removing a redundant 

reference to section 1923(g)(1)(A) of the 

Act. 

Further, we proposed to revise 

§ 455.304(d)(4), which specifies that 

Medicaid payments, including FFS, 

supplemental/enhanced, and Medicaid 

managed care payments made to a 

hospital ‘‘for furnishing inpatient 

hospital and outpatient hospital services 

to Medicaid eligible individuals,’’ 

should be included in the calculation of 

the hospital-specific DSH limit. We 

proposed this change because for most 

hospitals, for SPRYs beginning on or 

after October 1, 2021, only costs 

incurred on behalf of Medicaid eligible 

individuals for whom Medicaid is the 

primary payer will be counted in the 

calculation of the hospital-specific DSH 

limit. Therefore, we proposed to revise 

§ 455.304(d)(4) to remove the reference 

to Medicaid eligible individuals and 

update the regulatory text to indicate 

that the DSH payments associated with 

inpatient hospital and outpatient 

hospital services provided to Medicaid 

individuals as determined in 

accordance with § 447.295(d) are 

included in the calculation of hospitalspecific DSH limit. 

Finally, we proposed to revise 

§ 455.304(d)(6), which requires that 

auditors include a description of the 

methodology for calculating each 

hospital’s hospital-specific DSH limit, 

including ‘‘how the State defines 

incurred inpatient hospital and 

outpatient hospital costs for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid eligible 

individuals.’’ We proposed this change 

because for most hospitals, for SPRYs 

beginning on or after October 1, 2021, 

the methodology by which these DSH 

payments were calculated and paid will 

be reflective of Medicaid costs and 

payments associated with Medicaid 

eligible individuals for whom Medicaid 

is the primary payer. Therefore, we 

proposed to revise § 455.304(d)(6) to 

remove the reference to Medicaid 

eligible individuals and update the 

regulatory text to indicate that inpatient 

hospital and outpatient hospital services 

provided to Medicaid individuals are 

determined in accordance with 

§ 447.295(d). 

We proposed that these and other 

CAA 2021-related proposals, noted in 

the respective sections, be applicable to 

fiscal years beginning on or after 

October 1, 2021, to align with the 

effective date of the CAA 2021. 

We solicited comments on these 

proposed changes. We did not receive 

public comments on the proposed 

changes to § 455.304 and are finalizing 

them as proposed, with minor phrasing 

changes to § 455.304(d)(1), (3), (4), and 

(6) replacing ‘‘pursuant to’’ with ‘‘in 

accordance with’’ to align with current 

style guidelines. 

H. Process and Calculation of State 

Allotments for FYs After FY 2008 

(§ 457.609) 

We have not published CHIP 

allotments in the Federal Register since 

the FY 2013 CHIP allotments. Each year 

following FY 2013, States have been 

notified of their CHIP allotments 

through email notifications or MBES/ 

CBES. We proposed to remove from 

§ 457.609(h), which references our 

discretionary option to publish in the 

Federal Register the national CHIP 

allotment amounts as determined on an 

annual basis for the FYs specified in 

statute. Instead, we proposed to post 

CHIP allotments in the MBES/CBES and 

at Medicaid.gov (or similar successor 

systems or websites) annually. We noted 

our belief that posting the CHIP 


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allotment amounts at Medicaid.gov and 

in the MBES/CBES is an efficient way 

to increase transparency by making the 

information more easily accessible to 

interested parties and would be less 

administratively burdensome for us. 

We solicited comments related to this 

proposed change and received public 

comments. The following is a summary 

of the public comments we received and 

our responses. 

Comment: Several commenters 

mentioned the CHIP Federal Register 

publication. Most of these comments 

were combined with the comments on 

the DSH allotment publication proposal, 

discussed earlier in this final rule. The 

concerns cited in those comments were 

related to the lack of transparency of 

MBES/CBES publications because those 

are not available to the public, and the 

accountability of a report being posted 

on Medicaid.gov, because a website can 

be changed while the Federal Register 

produces static, dated publications. One 

comment opposed the removal of the 

April 1 target publication date for CHIP 

allotments. 

Response: We are finalizing this 

policy as proposed. Although the CHIP 

allotment publication proposal and the 

DSH allotment publication proposal 

may appear similar, the CHIP proposal 

is distinct in that the prior regulation 

already afforded CMS discretion 

whether or not to publish the CHIP 

allotments in the Federal Register, 

which CMS has not done since FFY 

2013. Please refer to the response in 

section II.A.4. of this rule, ‘‘Limitations 

on Aggregate Payments for DSHs 

Beginning October 1, 1992,’’ for a 

response to the DSH allotment 

publication comments. A couple 

comments received that referenced 

CHIP but requested we continue to 

publish in the Federal Register are not 

actually relevant to CHIP, since CHIP 

allotments have not been published in 

the Federal Register in recent years. 

We also note that the new regulation 

commits us to publishing final CHIP 

allotments on Medicaid.gov, which is 

not currently done, thereby increasing 

transparency for CHIP allotments. We 

also note that the current CHIP 

allotment regulation does not include 

the April 1 date; that was only part of 

the similar DSH allotment publication 

policy we are finalizing in this rule. 

However, we note the lack of the target 

date would not affect States receiving 

their necessary information, a concern 

cited by the commenter. As with the 

DSH allotments, we inform States as 

soon as information is available about 

their respective allotment amounts. 

Removing the target date for a final, 

public report simply affords CMS room 

to finalize data in instances where a 

State is late submitting data to CMS. 

III. Retroactive Application of the Rule 

The amendments made by section 

division CC, title II, section 203 of the 

CAA 2021, require that the changes to 

the calculations of Medicaid hospitalspecific DSH limits take effect on 

October 1, 2021, and apply to payment 

adjustments made under section 1923 of 

the Act during fiscal years beginning on 

or after that date. Accordingly, the CAA 

2021 provisions finalized in this rule at 

§§ 447.295(b) and (d), 447.299(c)(6), (7), 

(10), and (16), and 455.304(d)(1), (3), (4), 

and (6) will apply retroactively as set 

out in statute. 

Comment: One commenter expressed 

concern on the retroactive application of 

the rule. The commenter requested that 

we limit the retroactive application to 

only those provisions that require such 

an application by statute. 

Response: As proposed, we are 

limiting the retroactive application to 

those provisions related to the CAA 

2021 changes. 

IV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA) (44 U.S.C. 3501 et seq.), 

we are required to provide 60-day notice 

in the Federal Register and solicit 

public comment before a ‘‘collection of 

information’’ requirement is submitted 

to the Office of Management and Budget 

(OMB) for review and approval. For the 

purpose of the PRA and this section of 

the preamble, collection of information 

is defined under 5 CFR 1320.3(c) of the 

PRA’s implementing regulations. 

To fairly evaluate whether an 

information collection should be 

approved by OMB, section 3506(c)(2)(A) 

of the PRA requires that we solicit 

comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Our effort to minimize the 

information collection burden on the 

affected public, including the use of 

automated collection techniques. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

In the February 24, 2023 (88 FR 

11865) proposed rule, we solicited 

public comment on each of the 

aforementioned issues for the sections 

of the rule that contained information 

collection requirements. We did not 

receive any such comments. 

A. Wage Estimates 

To derive average costs, we used data 

from the U.S. Bureau of Labor Statistics’ 

(BLS) May 2022 National Occupational 

Employment and Wage Estimates for all 

salary estimates (https://www.bls.gov/ 

oes/2022/may/oes_nat.htm). In this 

regard, Table 1 presents BLS’ mean 

hourly wage, our estimated cost of 

fringe benefits and other indirect costs 

(calculated at 100 percent of salary), and 

our adjusted hourly wage. 

As indicated, we are adjusting our 

employee hourly wage estimates by a 

factor of 100 percent. This is necessarily 

a rough adjustment, both because fringe 

benefits and overhead costs vary 

significantly from employer to 

employer, and because methods of 

estimating these costs vary widely from 

study to study. Nonetheless, we believe 


ddrumheller on DSK120RN23PROD with RULES4ER23FE24.000</GPH>

TABLE 1: National Occupational Employment and Wage Estimates 

Accountants and auditors 13-2011 41.70 41.70 83.40 

13-2099 40.18 40.18 80.36 

11-9199 67.88 67.88 135.76 
Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13941 

that doubling the hourly wage to 

estimate total cost is a reasonably 

accurate estimation method. 

B. Information Collection Requirements 

(ICR) 

The following ICR section sets out 

requirements and burden that are 

subject to OMB review and approval 

under the authority of the PRA. 

The provisions that are not discussed 

in this section (IV) of the preamble are 

not associated with any information 

collection requirements. In that regard 

they are not subject to the requirements 

of the PRA. For this rule’s full burden 

implications, please see the Regulatory 

Impact Analysis under section V. of this 

preamble. 

1. ICRs Regarding DSH Reporting 

Requirements (§ 447.299) 

The following changes will be 

submitted to OMB for approval under 

control number 0938–0746 (CMS–R– 

266). 

Under § 447.299 as finalized in this 

rule, States will be required to provide 

an additional data element as part of 

their annual DSH audit reports. This 

additional element will require a State 

auditor to quantify the financial impact 

of any audit finding not captured within 

any other data element under 

§ 447.299(c), which may affect whether 

each hospital has received DSH 

payments for which it is eligible within 

its hospital-specific DSH limit. 

The additional data element requires 

auditors to indicate the financial impact 

of all findings rather than indicating 

that the financial impact of any finding 

is unknown. 

The burden consists of the time it 

would take each State to quantify any 

audit finding identified during the 

independent certified audit required 

under section 1923(j)(2) of the Act. As 

we rarely receive audits with no 

identified findings, we assume (for the 

purposes of this estimate) that all 

applicable States will complete this 

work. The territories have been 

excluded from this requirement since 

they do not receive a DSH allotment 

under section 1923(f) of the Act. We 

have also excluded Massachusetts from 

the total burden estimate, as it currently 

does not complete DSH audits because 

its entire DSH allotment amount is 

diverted for payments under a section 

1115 demonstration project. 

We believe the additional burden 

associated with the new data element 

would be 2 hours given that auditors are 

already engaged in a focused review of 

available documentation to quantify the 

aggregate amounts that comprise each of 

the existing data elements required 

under § 447.299(c). We estimate that the 

2 hours would consist of 1 hour at 

$80.36/hr for a financial specialist to 

add the additional data to the report and 

1 hour at $135.76/hr for management 

and professional staff to review the 

additional data in the report. In 

aggregate we estimate an annual burden 

of 100 hours (50 States × 2 hr/response 

× 1 response/year) at a cost of $10,806 

(50 States × [(1 hr × $135.76/hr) + (1 hr 

× $80.36/hr)]). 

If the auditor is unable to determine 

the actual financial impact amount of an 

audit finding, the auditor would be 

required to provide a statement of the 

estimated financial impact for each 

audit finding identified in the 

independent certified audit. For the 

purposes of this burden estimate, we 

assume that every State may have some 

quantifiable findings and some 

unquantifiable findings. As such, we 

anticipate that a State auditor would 

have to spend an additional 1 hour at 

$83.40/hr quantifying the financial 

impact of DSH findings that are 

classified as unknown. In aggregate, we 

estimate an annual burden of 50 hours 

(50 States × 1 hr) at a cost of $4,170 (50 

hr × $83.40/hr). 

When taking into account the 50 

percent Federal administrative match, 

we estimate an annual cost of $7,488 

([$10,806 + $4,170] × 0.5). 

C. Summary of Annual Burden 

Estimates 

Table 2 summarizes the burden for 

the provisions. 

In this rule our proposed burden 

estimates have been adjusted by using 

BLS’ most recent wage estimates (May 

2022 vs May 2021) and by accounting 

for 50 respondents, instead of the 51 

respondents that was accounted for in 

our proposed rule to remove 

Massachusetts as it currently does not 

complete DSH audits because its entire 

DSH allotment amount is diverted for 

payments under a section 1115 

demonstration project. 

V. Regulatory Impact Analysis 

A. Statement of Need 

This final rule will codify in Federal 

regulations the statutory requirements of 

division CC, title II, section 203 of the 

CAA 2021, which relate to Medicaid 

shortfall and third-party payments. 

These changes are necessary to align 

with Federal statute and to provide 

States and hospitals an understanding of 

how qualifying hospitals’ DSH 

payments may be impacted by the CAA 

2021. These changes are necessary in 

order to reflect the statutory changes to 

section 1923(g) of the Act to update the 

methodology for calculating the 

Medicaid shortfall portion of the 

hospital-specific DSH limit to only 

include costs and payments for hospital 

services furnished to beneficiaries for 

whom Medicaid is the primary payer, 

and to codify the exception for certain 

hospitals that are in the 97th percentile 

or above of all hospitals with respect to 

the number of Medicare SSI days or 

percentage of Medicare SSI days to total 

inpatient days. 

Since we were required to engage in 

rulemaking to codify the statutory 


ddrumheller on DSK120RN23PROD with RULES4ER23FE24.001</GPH>

TABLE 2: Annual Recordkeeping and Reporting Requirements 

§ 447.299 0938-0746 50 50 2 100 varies 10,806 5,403 

DSH audit (CMS-R- 50 50 50 83.40 4,170 2,085 266 

Total 50 2 100 varies 150 varies 

7,488 

14,976 
13942 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

changes made under the CAA 2021, we 

also took the opportunity to update 

certain DSH regulations to provide 

additional clarity and efficiency. The 

changes to the BNF and associated 

calculations performed under the 

DHRM will provide better clarity for 

States that divert all or a portion of their 

DSH allotment under an approved 

section 1115 demonstration. We are also 

adding additional specificity to the 

reporting requirements of the annual 

DSH audit conducted by an 

independent auditor, which will 

enhance Federal oversight of the 

Medicaid DSH program. Additionally, 

we will improve the accurate 

identification and collection of 

overpayments identified through the 

annual DSH independent certified 

audits by specifying the date of 

discovery and standards for return of 

FFP or redistribution of DSH payments 

made to providers in excess of the 

hospital-specific limit. Finally, this final 

rule will alleviate the administrative 

burden of publishing the annual DSH 

and CHIP allotments in the Federal 

Register, of which we also notify States 

directly by providing notification 

through other, more practical means. 

B. Overall Impact 

We have examined the impacts of this 

final rule as required by Executive 

Order 12866 on Regulatory Planning 

and Review (September 30, 1993), 

Executive Order 13563 on Improving 

Regulation and Regulatory Review 

(January 18, 2011), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Act, section 202 of the Unfunded 

Mandates Reform Act of 1995 (March 

22, 1995; Pub. L. 104–4), Executive 

Order 13132 on Federalism (August 4, 

1999), and the Congressional Review 

Act (5 U.S.C. 804(2)). 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). The Executive Order 14094, 

entitled ‘‘Modernizing Regulatory 

Review’’ (hereinafter, the Modernizing 

E.O.), amends section 3(f)(1) of 

Executive Order 12866 (Regulatory 

Planning and Review). The amended 

section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule: (1) having an annual effect on the 

economy of $200 million or more in any 

1 year (adjusted every 3 years by the 

Administrator of OMB’s Office of 

Information and Regulatory Affairs 

(OIRA) for changes in gross domestic 

product), or adversely affect in a 

material way the economy, a sector of 

the economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local, territorial, or tribal 

governments or communities; (2) 

creating a serious inconsistency or 

otherwise interfering with an action 

taken or planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raise legal or policy issues for which 

centralized review would meaningfully 

further the President’s priorities or the 

principles set forth in this Executive 

order, as specifically authorized in a 

timely manner by the Administrator of 

OIRA in each case. 

A regulatory impact analysis (RIA) 

must be prepared for major rules with 

significant regulatory action/s and/or 

with significant effects as per section 

3(f)(1) ($200 million or more in any 1 

year). Based on our estimates using a 

‘‘no action’’ baseline, OIRA has 

determined that this rulemaking is 

‘‘significant’’ under section 3(f)(1) and 

meets the criteria set forth in 5 U.S.C. 

804(2) under subtitle E of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996 (also known as the 

Congressional Review Act)’’. 

C. Detailed Economic Analysis 

Some amendments made by the CAA 

2021 required us to propose regulatory 

updates, but there are statutory changes 

that are effective regardless of our 

actions. Typically, under OMB Circular 

A–4, our analysis for instances such as 

this would utilize a ‘‘pre-statute’’ 

baseline. However, we are unable to 

assess the impact of the statutory 

changes in a meaningful way due to the 

potential for variation in the Medicare 

cost reporting and claims data, as well 

as supplemental security income 

eligibility data, that inform the new 

standard. Additionally, the ranking 

created by those data whereby an 

unknown 3 percent of entities would 

have the higher of two options, further 

inhibited our ability to estimate the 

impact in a meaningful way. Therefore, 

for the assessment of incremental 

economic impact that appears below, 

we compare the effects of this 

rulemaking against a ‘‘no action’’ 

baseline. This baseline incorporates the 

statutory changes made by the CAA 

2021 that do not require rulemaking to 

be in effect, such as the change to the 

definition of Medicaid shortfall. This 

will be the focus of our analysis. 

Similarly, for the non-CAA 2021- 

required or related DSH provisions in 

the proposed rule, our analytical 

baseline is a direct comparison between 

the proposed provisions and not 

finalizing this rule. 

Because the impact of our rule 

depends on downstream impacts of 

changes created in statute unaffected by 

this rulemaking, such as the change to 

only include Medicaid costs and 

payments in the hospital-specific DSH 

limit when Medicaid is the primary 

payer, calculating financial cost and 

transfer impacts specific to this 

rulemaking presents challenges which 

we will discuss further in those 

sections. 

1. Benefits 

The policies in this final rule will 

enhance Federal oversight of the 

Medicaid DSH program, improve the 

accuracy of DSH audit overpayments 

identified through and collected as a 

result of annual DSH audits, and 

provide clarity on certain existing 

Medicaid DSH policies. This final rule 

will codify certain existing CMS 

policies, including that the date of 

discovery of DSH overpayments is 

determined according to the earliest of 

the date on which the State submits its 

annual DSH independent certified audit 

to CMS, or any of the dates specified in 

§ 433.316(c). Further, this final rule will 

provide additional transparency 

regarding the DSH allotment reductions 

calculated under the DHRM, specifically 

regarding the BNF, by updating the 

applicable regulations to specify that 

amounts diverted under a section 1115 

demonstration approved after July 31, 

2009, or approved as of that date but for 

a purpose other than coverage 

expansion, are subject to reduction 

under the HMF and HUF. Further, these 

regulatory updates will provide 

transparency regarding how the 

amounts diverted under a section 1115 

demonstration are to be determined and 

applied in the DHRM. In addition, this 

final rule includes specific details 

related to the development and 

application of the data set used to 

determine the qualification for the 

exception for 97th percentile hospitals. 

This final rule details how hospitalspecific DSH limits should be calculated 

under section 1923(g) of the Act and 

reported in the independent certified 

audit, as specified in § 447.299(c). 

Further, the additional data reporting 

element in § 447.299(c)(21) will 

strengthen CMS oversight of the 

Medicaid DSH program and better 

ensure compliance with the hospitalspecific DSH limit under section 1923(g) 

of the Act. Finally, this final rule will 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13943 

also allow CMS to provide annual DSH 

and CHIP allotment information in a 

timely and accessible manner while 

reducing unnecessary administrative 

burden by eliminating the §§ 447.297(c) 

and 457.609 requirement and option, 

respectively, to publish these annual 

allotments in a Federal Register notice. 

2. Costs 

Under § 447.299, this final rule will 

require States to determine the hospitalspecific DSH limit for hospitals meeting 

the exception for 97th percentile 

hospitals. For these hospitals, the 

hospital-specific DSH limit is calculated 

using the higher value of either the 

hospital-specific DSH limit amount 

determined for the hospital under 

section 1923(g)(1)(A) of the Act as 

amended by section 203 of the CAA 

2021 or the amount determined for the 

hospital under section 1923(g)(1)(A) of 

the Act as in effect on January 1, 2020. 

This amount will be captured under the 

reporting element at § 447.299(c)(10). 

While we proposed that CMS will 

produce the source of data used to 

identify hospitals qualifying to meet the 

exception for 97th percentile hospitals, 

this will require a State auditor to 

calculate two separate hospital-specific 

DSH limits and determine the higher 

value thereof for hospitals meeting this 

exception. Given this exception applies 

to a limited number of hospitals and 

that the identity of these hospitals and 

the information required to determine 

their hospital-specific DSH limit 

amounts under both calculations would 

be based on readily available 

information, we believe the additional 

burden associated with determining the 

hospital-specific DSH limit for hospitals 

qualifying under this exception to be 

minimal. 

To estimate the overall burden of 

adding this requirement for the 

calculation of the hospital-specific DSH 

limit for hospitals meeting the exception 

for 97th percentile hospitals, we 

considered the number of annual 

independent certified audits received by 

CMS in addition to the limited number 

of hospitals that will qualify under this 

exception. In order for States to assess 

which hospitals meet the exception, we 

estimate that it would take 

approximately 2 hours, consisting of: 1 

hour at $80.36/hr for a financial 

specialist to prepare the aforementioned 

spreadsheet report, and 1 hour at 

$135.76/hr for management and 

professional staff to review the report. In 

the aggregate, we estimate an ongoing 

annual burden of 100 hours (50 States 

× 2 hr/response × 1 response/year) at a 

cost of $10,806 (50 States × [(1 hr 

$135.76/hr) + (1 hr × $80.36/hr)] or 

$216.12 per State [$10,806/50 States]). 

Additionally, we anticipate that a State 

auditor would have to spend an 

additional hour verifying the hospitalspecific DSH limits for hospitals 

meeting the exception for 97th 

percentile hospitals. The estimated 

annual burden would be 1 hour per 

State (50 States × 1 hour) 50 hours × 

$83.40/hr for auditors to complete the 

audit at a cost of $4,170 per year (50 

States × 1 hour × $83.40 per hour). The 

total cost of this provision of the 

proposed rule would be $14,976 

($10,806 + $4,170) and 150 hours, or 

$299.52 and 3 hours per State. 

As described in section IV.C.1. of this 

final rule, the additional DSH audit data 

reporting element creates a burden of 

150 hours at a cost of $14,976, with an 

average of 3 hours ($299.52 hr/50 States) 

at a cost of $299.52 per State Medicaid 

agency per year ($14,976/50 States). 

We do not estimate there will be a 

cost impact related to the DHRM BNF 

proposal. This proposal merely provides 

clarification regarding how amounts are 

determined, and the impact of the 

policy itself was accounted for the in 

the 2019 final rule that finalized the 

factor amounts. Therefore, the only 

costs would be associated with review 

of this rule, which are accounted for in 

part 4 of this section. 

Similarly, there will be no cost impact 

related to the proposals to publish DSH 

and CHIP allotments through an 

alternative means. Under current CMS 

practice, States are already informed of 

their allotment amounts prior to the 

Federal Register publication, so the 

removal of that step will not require a 

change in entities’ practices or systems. 

3. Transfers 

Although the policies discussed in 

this final rule would affect the 

calculation of the hospital-specific DSH 

limit established at section 1923(g) of 

the Act and some providers may see a 

decrease in their historic hospitalspecific DSH limits, these effects are a 

direct result of statutory changes rather 

than the proposals in this rule. In 

addition, some providers may see an 

increase in their historic hospitalspecific DSH limits, again as a result of 

the changes made by statute. Further, 

lower hospital-specific DSH limits for 

some hospitals may result in States 

choosing to distribute higher DSH 

payments to hospitals that historically 

had not been paid at higher levels. We 

note that this rule would not affect the 

considerable flexibility afforded States 

in setting DSH State plan payment 

methodologies to the extent that these 

methodologies are consistent with 

section 1923(c) of the Act and all other 

applicable statutes and regulations. 

Therefore, we cannot predict whether 

and how States would exercise their 

flexibility in setting DSH payments to 

account for changes in historic hospitalspecific DSH limits and how this would 

affect individual providers or specific 

groups of providers. We invited 

comments from State agencies and 

hospitals providing information or data 

for the calculation of these estimates. 

We did not receive any data that would 

aid in calculating a more accurate 

estimate. We made minor adjustments 

to correct the total number of States 

whose DSH programs would be 

impacted by the provisions of this rule 

and to reflect the latest BLS wage data, 

but otherwise and generally we are 

finalizing the estimates as proposed. 

4. Regulatory Review Cost Estimation 

If regulations impose administrative 

costs on private entities, such as the 

time needed to read and interpret this 

final rule, we estimate the cost 

associated with regulatory review. Due 

to the uncertainty involved with 

accurately quantifying the number of 

entities that will review the rule, we 

assume that States, Medicaid DSH 

hospitals, and independent auditors 

will likely be reviewers of this final 

rule. We acknowledge that this 

assumption may understate or overstate 

the costs of reviewing this rule. It is 

possible that not all Medicaid DSH 

hospitals will choose to review 

individually, or that State agencies will 

have multiple people in different roles 

review. Nevertheless, we thought the 

entities directly or indirectly impacted 

by this rule served as the best basis. As 

such, we will assume half of the 

approximately 2,700 Medicaid DSH 

hospitals will review the rule, in 

addition to at least one person from 

each of the 50 State agencies impacted 

by this rule, and at least one person 

from the independent DSH auditor for 

each of the 50 States, resulting in 1,450 

total entities. We welcomed comments 

on the approach in estimating the 

number of entities which will review 

this final rule. 

Although this rule has a number of 

provisions, they more or less all relate 

to DSH, and we assume entities with 

DSH equities will review the entire rule. 

Using the 2022 wage information from 

the BLS, https://www.bls.gov/oes/ 

current/oes119111.htm, for medical and 

health service managers (Code 11– 

9111), we estimate that the cost of 

reviewing this rule is $123.06 per hour, 

including overhead and other indirect 

costs. We estimate that it would take 

approximately 2 hours for the staff to 

review this final rule. For each entity 


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13944 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

that reviews the rule, the estimated cost 

is $246.12 (2 hours × $123.06). 

Therefore, we estimate that the total 

one-time cost of reviewing this 

regulation is $356,874 ($246.12 × 1,450). 

D. Alternatives Considered 

In developing this final rule, the 

following alternatives were considered: 

1. Not Finalizing the Rule 

Despite the effort involved in 

developing a proposed rule, we still 

consider whether the effort of finalizing 

the proposed rule, in general, is 

worthwhile and necessary additional 

effort to meet policy goals. As with the 

proposed rule, we concluded that, due 

to the changes to regulatory language 

necessitated by the legislation, 

rulemaking was necessary. Accordingly, 

once the decision to issue a final rule 

was reached, the additional DSH-related 

provisions were discrete decisions and 

not part of the calculus of whether to 

issue a final rule. 

2. The Most Recent Cost Reporting 

Period Reports 

As discussed in section II.A.3. of this 

final rule, we performed additional 

work to consider where data anomalies 

that exist in the status of available cost 

reports should impact our proposal to 

use the total inpatient days from the 

cost report with the most updated cost 

report status, for the most recent cost 

reporting period, available on the day 

that the data are pulled, in determining 

the hospitals that meet the 97th 

percentile threshold. However, through 

our additional review we determined 

our proposal was most in line with the 

statutory requirement to use the most 

recent cost reporting period and that 

anomalies in the status of the most 

recent reports did not create issues that 

would affect our decision. 

3. Lookback Period for Cost Reporting 

CMS considered various alternatives 

for making the determination regarding 

how far back the time period of a 

hospital’s cost report could relate in 

order to be included in the data set for 

the calculation of hospitals that meet 

the 97th percentile threshold exception. 

We proposed not including any cost 

report ending earlier than September 30, 

3 years prior to the March 31 snapshot 

date for compiling the data set. For the 

proposed rule, we considered a shorter 

cutoff, such as excluding any cost report 

ending earlier than September 30, 2 

years prior to the March 31 snapshot 

date. However, we were concerned that 

establishing too short of a cutoff could 

exclude a material number of hospitals 

due to either delays in hospitals filing 

cost reports or delays in the transmitting 

and processing of cost report files into 

HCRIS. At that time, we also considered 

a longer cutoff than 3 years, but we were 

concerned this could create too much 

variability in the cost reporting periods 

and would also capture in the data set 

hospitals that are currently inactive or 

terminated. While the proposed rule 

was out for comment, we continued 

assessing whether expanding to 4 years 

would be a net positive for DSH 

hospitals. However, our additional 

testing did not demonstrate a benefit in 

expanding to 4 years and therefore we 

did not amend the proposal in this final 

rule. We believe the 3-year cutoff is 

equitable in ensuring there is general 

consistency in the cost reporting periods 

used, conforms with the use of ‘‘most 

recent cost reporting period,’’ and is 

practical for implementation purposes. 

E. Accounting Statement and Table 

As required by OMB Circular A–4 

(available at https://

www.whitehouse.gov/wp-content/ 

uploads/legacy_drupal_files/omb/ 

circulars/A4/a-4.pdf), we have prepared 

an accounting statement in Table 3 

showing the classification of the costs 

associated with the provisions of this 

final rule. 

F. Regulatory Flexibility Act (RFA) 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. The great majority of hospitals 

and most other health care providers 

and suppliers are small entities, either 

by being nonprofit organizations or by 

meeting the Small Business 

Administration definition of a small 

business (having revenues of less than 

$9.0 million to $47 million in any 1 

year). Individuals and States are not 

included in the definition of a small 

entity. As its measure of significant 

economic impact on a substantial 

number of small entities, HHS uses a 

change in revenue of more than 3 to 5 

percent. We do not believe that this 

threshold will be reached by the 

provisions in this final rule. 

This rule establishes requirements 

that are solely the responsibility of State 

Medicaid agencies, which are not small 

entities. Therefore, the Secretary 

certifies this final rule would not, if 

issued, have a significant economic 

impact on a substantial number of small 

entities. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a metropolitan statistical area and has 

fewer than 100 beds. This rule will not 

have a significant impact on the 

operations of a substantial number of 

small rural hospitals. 

G. Unfunded Mandates Reform Act 

(UMRA) 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 


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TABLE 3: Accounting Statement--Classification of Estimated Effects 

Units 

Category Estimates Year Discount Period 

Rate Covered 

Annualized Monetized ($million/year) 0.01 2021 7% 2022 - 2032 

0.01 2021 3% 2022-2032 

Transfers (From Whom to Whom) Federal to States 

Annualized Monetized ($million/year) 0.04 2021 I 7% 2022 

0.04 2021 I 3% 2022 

Costs Regulatory Review Costs 
Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13945 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2024, that 

threshold is approximately $183 

million. This rule does not contain 

mandates that will impose spending 

costs on State, local, or tribal 

governments in the aggregate, or by the 

private sector, in excess of the 

threshold. 

H. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it issues a proposed 

rule that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has federalism implications. 

This rule does not impose substantial 

direct costs on State or local 

governments, preempt State law, or 

otherwise have federalism implications. 

I. Conclusion 

The policies in this final rule will 

enable CMS to implement statutory 

changes, strengthen financial oversight, 

clarify existing financial management 

policies, and reduce unnecessary 

administrative burden. 

The analysis in this section V., 

together with the rest of this preamble, 

provides a regulatory impact analysis. In 

accordance with the provisions of 

Executive Order 12866, this final rule 

was reviewed by the Office of 

Management and Budget. 

Chiquita Brooks-LaSure, 

Administrator of the Centers for 

Medicare & Medicaid Services, 

approved this document on February 

15, 2024. 

List of Subjects 

42 CFR Part 433 

Administrative practice and 

procedure, Child support, Claims, Grant 

programs—health, Medicaid, Reporting 

and recordkeeping requirements. 

42 CFR Part 447 

Accounting, Administrative practice 

and procedure, Drugs, Grant programs— 

health, Health facilities, Health 

professions, Medicaid, Reporting and 

recordkeeping requirements, Rural 

areas. 

42 CFR Part 455 

Fraud, Grant programs—health, 

Health facilities, Health professions, 

Investigations, Medicaid, Reporting and 

recordkeeping requirements. 

42 CFR Part 457 

Administrative practice and 

procedure, Grant programs—health, 

Health insurance, Reporting and 

recordkeeping requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as set forth below: 

PART 433—STATE FISCAL 

ADMINISTRATION 

■ 1. The authority citation for part 433 

continues to read as follows: 

Authority: 42 U.S.C. 1302. 

■ 2. Amend § 433.316 by— 

■ a. Redesignating paragraphs (f) 

through (h) as paragraphs (g) through (i), 

respectively; and 

■ b. Adding a new paragraph (f). 

The addition reads as follows: 

§ 433.316 When discovery of overpayment 

occurs and its significance. 

* * * * * 

(f) Overpayments identified through 

the disproportionate share hospital 

(DSH) independent certified audit. In 

the case of an overpayment identified 

through the independent certified audit 

required under part 455, subpart D, of 

this chapter, CMS will consider the 

overpayment as discovered on the 

earliest of the following: 

(1) The date that the State submits the 

independent certified audit report 

required under § 455.304(b) of this 

chapter to CMS. 

(2) Any of the dates specified in 

paragraph (c)(1), (2), or (3) of this 

section. 

* * * * * 

PART 447—PAYMENTS FOR 

SERVICES 

■ 3. The authority citation for part 447 

continues to read as follows: 

Authority: 42 U.S.C. 1302 and 1396r–8. 

■ 4. Amend § 447.294 by revising 

paragraphs (e)(12) introductory text and 

(e)(12)(i) and (ii) to read as follows: 

§ 447.294 Medicaid disproportionate share 

hospital (DSH) allotment reductions. 

* * * * * 

(e) * * * 

(12) Section 1115 budget neutrality 

factor (BNF) calculation. This factor is 

only calculated for States for which all 

or a portion of the DSH allotment was 

included in the calculation of budget 

neutrality under a section 1115 

demonstration in accordance with an 

approval on or before July 31, 2009. 

CMS will calculate the BNF for 

qualifying States by the following: 

(i) For States in which the State’s DSH 

allotment was included in the budget 

neutrality calculation for a coverage 

expansion that was approved under 

section 1115 as of July 31, 2009, 

determining the amount of the State’s 

DSH allotment included in the budget 

neutrality calculation for coverage 

expansion. This amount is not subject to 

reductions under the HMF and HUF 

calculations. DSH allotment amounts 

included in the budget neutrality 

calculation for purposes other than 

coverage expansion for a demonstration 

project under section 1115 that was 

approved as of July 31, 2009, are subject 

to reduction as specified in paragraphs 

(e)(12)(ii) through (iv) of this section. 

For States whose DSH allotment was 

included in the budget neutrality 

calculation for a demonstration project 

that was approved under section 1115 

after July 31, 2009, whether for coverage 

expansion or otherwise, the entire DSH 

allotment amount that was included in 

the budget neutrality calculation is 

subject to reduction as specified in 

paragraphs (e)(12)(ii) through (iv) of this 

section. 

(ii) Determining the amount of the 

State’s DSH allotment included in the 

budget neutrality calculation subject to 

reduction. The amount to be assigned 

reductions under paragraphs (e)(12)(iii) 

and (iv) of this section is the total of 

each State’s DSH allotment diverted 

under an approved 1115 demonstration 

during the period that aligns with the 

associated State plan rate year DSH 

audit utilized in the DSH allotment 

reductions. 

* * * * * 

■ 5. Amend § 447.295 by adding a 

definition for ‘‘97th percentile hospital’’ 

in alphanumerical order in paragraph 

(b) and revising paragraph (d) to read as 

follows: 

§ 447.295 Hospital-specific 

disproportionate share hospital payment 

limit: Determination of individuals without 

health insurance or other third-party 

coverage. 

* * * * * 

(b) * * * 

97th percentile hospital means a 

hospital that is in at least the 97th 

percentile of all hospitals nationwide 

with respect to the hospital’s number of 

inpatient days or the hospital’s 

percentage of total inpatient days, for 

the hospital’s most recent cost reporting 

period, made up of patients who were 

entitled to benefits under part A of title 

XVIII and supplemental security income 

benefits under title XVI (excluding any 

State supplementary benefits paid). 

(i) CMS will identify the 97th 

percentile hospitals, for each Medicaid 


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13946 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

State plan rate year beginning on or after 

October 1, 2021, using Medicare cost 

reporting and claims data sources, as 

well as supplemental security income 

eligibility data provided by the Social 

Security Administration. 

(ii) CMS will publish lists identifying 

each 97th percentile hospital annually 

in advance of October 1 of each year. 

CMS will revise a published list only to 

correct a mathematical or other similar 

technical error that is identified to CMS 

during the one-year period beginning on 

the date the list is published. 

* * * * * 

(d) Hospital-specific DSH limit 

calculation. (1) For each State’s 

Medicaid State plan rate years 

beginning prior to October 1, 2021 and 

subject to paragraph (d)(3) of this 

section, only costs incurred in providing 

inpatient hospital and outpatient 

hospital services to Medicaid 

individuals, and revenues received with 

respect to those services, and costs 

incurred in providing inpatient hospital 

and outpatient hospital services, and 

revenues received with respect to those 

services, for which a determination has 

been made in accordance with 

paragraph (c) of this section that the 

services were furnished to individuals 

who have no source of third-party 

coverage for the specific inpatient 

hospital or outpatient hospital service 

are included when calculating the costs 

and revenues for Medicaid individuals 

and individuals who have no health 

insurance or other source of third-party 

coverage for purposes of section 

1923(g)(1) of the Act. 

(2) For each State’s first Medicaid 

State plan rate year beginning on or after 

October 1, 2021, and thereafter, subject 

to paragraph (d)(3) of this section, only 

costs incurred in providing inpatient 

hospital and outpatient hospital services 

to Medicaid individuals when Medicaid 

is the primary payer for such services, 

and revenues received with respect to 

those services, and costs incurred in 

providing inpatient hospital and 

outpatient hospital services, and 

revenues received with respect to those 

services, for which a determination has 

been made in accordance with 

paragraph (c) of this section that the 

services were furnished to individuals 

who have no source of third-party 

coverage for the specific inpatient 

hospital or outpatient hospital service 

are included when calculating the costs 

and revenues for Medicaid individuals 

and individuals who have no health 

insurance or other source of third-party 

coverage for purposes of section 

1923(g)(1) of the Act. 

(3) Effective for each State’s first 

Medicaid State plan rate year beginning 

on or after October 1, 2021, and 

thereafter, the hospital-specific DSH 

limit for a 97th percentile hospital 

defined in paragraph (b) of this section 

is the higher of the values from the 

calculations described in paragraphs 

(d)(1) and (2) of this section. 

§ 447.297 [Amended] 

■ 6. Amend § 447.297 by: 

■ a. In paragraph (b), removing the 

phrase ‘‘published by April 1 of each 

Federal fiscal year,’’ and adding in its 

place the phrase ‘‘posted as soon as 

practicable,’’; 

■ b. In paragraph (c)— 

■ i. Removing the phrase ‘‘publish in 

the Federal Register’’ and adding in its 

place the phrase ‘‘post in the Medicaid 

Budget and Expenditure System/State 

Children’s Health Insurance Program 

Budget and Expenditure System and at 

Medicaid.gov (or similar successor 

system or website)’’; and 

■ ii. Removing the phrase ‘‘publish final 

State DSH allotments by April 1 of each 

Federal fiscal year,’’ and adding in its 

place the phrase ‘‘post final State DSH 

allotments as soon as practicable for 

each Federal fiscal year,’’; and 

■ c. In paragraph (d)(1)— 

■ i. Removing the phrase ‘‘by April 1 of 

each Federal fiscal year’’ and adding in 

its place the phrase ‘‘as soon as 

practicable for each Federal fiscal year’’; 

and 

■ ii. Removing the phrase ‘‘prior to the 

April 1 publication date’’ and adding in 

its place the phrase ‘‘prior to the posting 

date’’; and 

■ d. Removing paragraph (e). 

■ 7. Amend § 447.299 by— 

■ a. Revising paragraphs (c)(6) and (7), 

(c)(10) introductory text, (c)(10)(ii), and 

(c)(16); 

■ b. Redesignating paragraph (c)(21) as 

paragraph (c)(22); and 

■ c. Adding new paragraph (c)(21) and 

paragraphs (f) and (g). 

The revisions and additions read as 

follows: 

§ 447.299 Reporting requirements. 

* * * * * 

(c) * * * 

(6) IP/OP Medicaid fee-for-service 

(FFS) basic rate payments. The total 

annual amount paid to the hospital 

under the State plan, including 

Medicaid FFS rate adjustments, but not 

including DSH payments or 

supplemental/enhanced Medicaid 

payments, for inpatient and outpatient 

hospital services furnished to Medicaid 

individuals, as determined in 

accordance with § 447.295(d). 

(7) IP/OP Medicaid managed care 

organization payments. The total annual 

amount paid to the hospital by 

Medicaid managed care organizations 

for inpatient hospital and outpatient 

hospital services furnished to Medicaid 

individuals, as determined in 

accordance with § 447.295(d). 

* * * * * 

(10) Total cost of care for Medicaid 

IP/OP services. The total annual costs 

incurred by each hospital for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid 

individuals as determined in 

accordance with § 447.295(d). The total 

annual costs are determined on a 

hospital-specific basis, not a servicespecific basis. For purposes of this 

section, costs— 

* * * * * 

(ii) Must capture the total burden on 

the hospital of treating Medicaid 

patients as determined in accordance 

with § 447.295(d), not including 

payment by Medicaid. Thus, costs must 

be determined in the aggregate and not 

by estimating the cost of individual 

patients. For example, if a hospital 

treats two Medicaid patients at a cost of 

$2,000 and receives a $500 payment 

from a third party for each individual, 

the total cost to the hospital for 

purposes of this section is $1,000, 

regardless of whether the third-party 

payment received for one patient 

exceeds the cost of providing the service 

to that individual. 

* * * * * 

(16) Total annual uncompensated 

care costs. The total annual 

uncompensated care cost equals the 

total cost of care for furnishing inpatient 

hospital and outpatient hospital services 

to Medicaid individuals as determined 

in accordance with § 447.295(d), and to 

individuals with no source of thirdparty coverage for the hospital services 

they receive, less the sum of regular 

Medicaid FFS rate payments, Medicaid 

managed care organization payments, 

supplemental/enhanced Medicaid 

payments, uninsured revenues, and 

section 1011 payments for inpatient and 

outpatient hospital services. This 

should equal the sum of paragraphs 

(c)(9), (12), and (13) of this section 

subtracted from the sum of paragraphs 

(c)(10) and (14) of this section. 

* * * * * 

(21) Financial impact of audit 

findings. The total annual amount 

associated with each audit finding. If it 

is not practicable to determine the 

actual financial impact amount, state 

the estimated financial impact for each 

audit finding identified in the 

independent certified audit that is not 

otherwise reflected in data elements 

described in this paragraph (c). For 


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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 13947 

purposes of this paragraph (c), audit 

finding means an issue identified in the 

independent certified audit required 

under § 455.304 of this chapter 

concerning the methodology for 

computing the hospital-specific DSH 

limit or the DSH payments made to the 

hospital, including, but not limited to, 

compliance with the hospital-specific 

DSH limit as defined in paragraph 

(c)(16) of this section. Audit findings 

may be related to missing or improper 

data, lack of documentation, noncompliance with Federal statutes or 

regulations, or other deficiencies 

identified in the independent certified 

audit. Actual financial impact means 

the total amount associated with audit 

findings calculated using the 

documentation sources identified in 

§ 455.304(c) of this chapter. Estimated 

financial impact means the total amount 

associated with audit findings 

calculated on the basis of the most 

reliable available information to 

quantify the amount of an audit finding 

in circumstances where complete and 

accurate information necessary to 

determine the actual financial impact is 

not available from the documentation 

sources identified in § 455.304(c) of this 

chapter. 

* * * * * 

(f) DSH payments found in the 

independent certified audit process 

under part 455, subpart D, of this 

chapter to exceed hospital-specific cost 

limits are provider overpayments which 

must be returned to the Federal 

Government in accordance with the 

requirements in part 433, subpart F, or 

redistributed by the State to other 

qualifying hospitals, if redistribution is 

provided for under the approved State 

plan. Overpayment amounts returned to 

the Federal Government must be 

separately reported on the Form CMS– 

64 as a decreasing adjustment which 

corresponds to the fiscal year DSH 

allotment and Medicaid State plan rate 

year of the original DSH expenditure 

claimed by the State. 

(g) As applicable, States must report 

any overpayment redistribution 

amounts on the Form CMS–64 within 2 

years from the date of discovery that a 

hospital-specific limit has been 

exceeded, as determined under 

§ 433.316(f) of this chapter in 

accordance with a redistribution 

methodology in the approved Medicaid 

State plan. The State must report 

redistribution of DSH overpayments on 

the Form CMS–64 as separately 

identifiable decreasing adjustments 

reflecting the return of the overpayment 

as specified in paragraph (f) of this 

section and increasing adjustments 

representing the redistribution by the 

State. Both adjustments must 

correspond to the fiscal year DSH 

allotment and Medicaid State plan rate 

year of the related original DSH 

expenditure claimed by the State. 

PART 455—PROGRAM INTEGRITY: 

MEDICAID 

■ 8. The authority citation for part 455 

continues to read as follows: 

Authority: 42 U.S.C. 1302. 

■ 9. Amend § 455.301 by revising the 

definition of ‘‘Independent certified 

audit’’ to read as follows: 

§ 455.301 Definitions. 

* * * * * 

Independent certified audit means an 

audit that is conducted by an auditor 

that operates independently from the 

Medicaid agency or subject hospitals 

and is eligible to perform the DSH audit. 

Certification means that the 

independent auditor engaged by the 

State reviews the criteria of the Federal 

audit regulation and completes the 

verification, calculations and report 

under the professional rules and 

generally accepted standards of audit 

practice. This certification includes a 

review of the State’s audit protocol to 

ensure that the Federal regulation is 

satisfied, an opinion for each 

verification detailed in the regulation, a 

determination of whether or not the 

State made DSH payments that 

exceeded any hospital’s hospitalspecific DSH limit in the Medicaid State 

plan rate year under audit, and a 

quantification of the financial impact of 

each audit finding on a hospital-specific 

basis. The certification also identifies 

any data issues or other caveats or 

deficiencies that the auditor identified 

as impacting the results of the audit. 

* * * * * 

■ 10. Amend § 455.304 by revising 

paragraphs (d)(1), (3), (4), and (6) to read 

as follows: 

§ 455.304 Condition for Federal financial 

participation (FFP). 

* * * * * 

(d) * * * 

(1) Verification 1. Each hospital that 

qualifies for a DSH payment in the State 

is allowed to retain that payment so that 

the payment is available to offset its 

uncompensated care costs for furnishing 

inpatient hospital and outpatient 

hospital services during the Medicaid 

State plan rate year to Medicaid 

individuals as determined in 

accordance with § 447.295(d) of this 

chapter, and individuals with no source 

of third-party coverage for the services, 

in order to reflect the total amount of 

claimed DSH expenditures. 

* * * * * 

(3) Verification 3. Only 

uncompensated care costs of furnishing 

inpatient and outpatient hospital 

services to Medicaid individuals as 

determined in accordance with 

§ 447.295(d) of this chapter, and 

individuals with no third-party coverage 

for the inpatient and outpatient hospital 

services they received are eligible for 

inclusion in the calculation of the 

hospital-specific disproportionate share 

limit payment limit, as described in 

section 1923(g)(1)(A) of the Act. 

(4) Verification 4. For purposes of this 

hospital-specific limit calculation, any 

Medicaid payments (including regular 

Medicaid fee-for-service rate payments, 

supplemental/enhanced Medicaid 

payments, and Medicaid managed care 

organization payments) made to a 

disproportionate share hospital for 

furnishing inpatient hospital and 

outpatient hospital services to Medicaid 

individuals as determined in 

accordance with § 447.295(d) of this 

chapter, which are in excess of the 

Medicaid incurred costs of such 

services, are applied against the 

uncompensated care costs of furnishing 

inpatient hospital and outpatient 

hospital services to individuals with no 

source of third-party coverage for such 

services. 

* * * * * 

(6) Verification 6. The information 

specified in paragraph (d)(5) of this 

section includes a description of the 

methodology for calculating each 

hospital’s payment limit under section 

1923(g)(1) of the Act. Included in the 

description of the methodology, the 

audit report must specify how the State 

defines incurred inpatient hospital and 

outpatient hospital costs for furnishing 

inpatient hospital and outpatient 

hospital services to Medicaid 

individuals as determined in 

accordance with § 447.295(d) of this 

chapter, and individuals with no source 

of third-party coverage for the inpatient 

hospital and outpatient hospital services 

they received. 

* * * * * 

PART 457—ALLOTMENTS AND 

GRANTS TO STATES 

■ 11. The authority for part 457 

continues to read as follows: 

Authority: 42 U.S.C. 1302. 

■ 12. Amend § 457.609 by revising 

paragraph (h) to read as follows: 


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13948 Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Rules and Regulations 

§ 457.609 Process and calculation of State 

allotments for a fiscal year after FY 2008. 

* * * * * 

(h) CHIP fiscal year allotment process. 

The national CHIP allotment and State 

CHIP allotments will be posted in the 

Medicaid Budget and Expenditure 

System/State Children’s Health 

Insurance Program Budget and 

Expenditure System and at 

Medicaid.gov (or similar successor 

system or website) as soon as 

practicable after the allotments have 

been determined for each Federal fiscal 

year. 

Xavier Becerra, 

Secretary, Department of Health and Human 

Services. 

[FR Doc. 2024–03542 Filed 2–20–24; 4:15 pm] 

BILLING CODE 4120–01–P 


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